Executives aren't always willing to admit there is fraud happening on their watch, so they convince themselves – and others – that it isn’t there.
Despite fraud remaining a consistent challenge for companies and organizations of all sizes, research shows many organizations tend to underestimate the extent of their fraud risk.
FEI Daily spoke with Dan Zitting, chief product officer at Vancouver-based risk management software provider ACL, about the potential for companies to minimize fraud concerns.
FEI Daily: Do companies tend to have an accurate understanding of their fraud exposures?
Dan Zitting: We surveyed more than 500 audit, compliance and risk management professionals in corporations and government entities on their organizations’ fraud environments, and we found an overwhelming realization that companies are truly living in an ‘alternate reality,’ with an inaccurate perception of their fraud and corruption environment.
More than 80 percent of respondents said their organization has “medium to no” exposure to fraud, despite industry research showing that fraud occurs in nearly every organization. More contradiction came from nearly two-thirds of respondents reporting that the majority of fraud committed in their organizations is not detected, and less than a quarter saying that all fraud detected is actually reported.
FEI Daily: Why is fraud undetected or unreported so frequently?
Zitting: That’s a major concern. Executives and government officials don’t want to admit there is fraud happening on their watch, so they convince themselves – and those around them – that it isn’t there, or at least that it’s not that important. It’s easier to believe ‘alternative facts’ when the truth is unfavorable.
When the fraud is minor, managers often perceive that reporting would bring more trouble than if they let it slide. However, while companies refuse to admit that fraud exists, it’s certain to continue. Additionally, as unscrupulous employees and vendors realize the company’s ignorance, this problem has great potential to grow.
FEI Daily: Generally speaking, how large is the fraud problem for organizations?
Zitting: The Association of Certified Fraud Examiners’ 2016 Global Fraud Study reviewed more than 2,400 cases, and although the median revenue lost to fraud is only around $150,000, in nearly one quarter of the instances, losses to fraud exceeded $1 million.
The total fraud lost in 2016 alone in just those 2,400 or so cases added up to over $6.3 billion, and that makes the issue pretty tough to ignore.
Meanwhile, the U.S. Government Accountability Office reported that more than $3.5 billion was recovered by the Department of Justice in FY2015 from civil cases involving fraud.
FEI Daily: Why does fraud tend to be ignored or underestimated?
Zitting: Respondents showed us about the pressure fraud professionals can feel to suppress or alter fraud findings. In my experience, this occurs in part because it can be easier to overlook the problem than to address it.
The existence of this internal pressure is not a surprise to most, as it has been revealed often in other research. However, this survey confirmed that pressure comes from all sides – from senior leadership, direct managers, coworkers and even audit committees – making it that much harder to overcome.
Ultimately, the perception that fraud, waste or abuse is non-existent in any company is really just that – a perception. Companies that were convinced they were running in fraud-free environments have then uncovered more than a million dollars in losses from claims that had been incorrectly processed—or not processed at all.
FEI Daily: How should companies respond?
Zitting: It really is shocking to see how disconnected many executives are from the true prevalence of fraud and corruption in their organizations. However, whistleblowers need to keep blowing their whistles, and decision-makers should start to take advantage of the advanced data analytics technology at their disposal to determine red flags and uncover fraud data trails. A combination of prevention and detection can really make a difference.
After reviewing the survey results, we created a Fraud Confessional on our website to allow professionals to anonymously tell their own fraud-related stories. Increasing the general awareness of fraud and the obstacles people face in tackling it in the workplace can bring us one step closer to eliminating it altogether.•