What fraud management means
Fraud management refers to security and monitoring concepts which enable a structured approach to so-called fraudulent activities: exposing, appraising and, ideally, avoiding them from the outset. Auditors consider fraudulent activity to be any activity that intentionally damages a company. Fraud management is aimed at both external and internal corporate crime.
Why fraud management is so important
Almost one in two companies is affected by corporate crime. The 2020 PwC Global Economic Crime and Fraud Survey found that 47 percent of companies worldwide had been victims of corporate crime at least once in the previous two years. However, each of these companies recorded an average of six corporate offences. The most common offences are customer fraud, cybercrime and property crimes such as breach of trust and embezzlement. The total damage amounted to around 40 billion euros. Despite this immense amount of damage, many affected companies didn’t react to the attacks at all: only 56 percent initiated investigations into their most serious incident.
Around 40 percent of offences can be traced back to external perpetrators. Employees are responsible for at least 37 percent of offences. The remaining cases involve both groups of perpetrators working together. And at least 19 percent of corporate offences can be attributed to fraud in purchasing.
“These numbers are alarming. It is all the more astonishing that many companies still do not react adequately to cases of corporate crime and do not invest enough in preventative measures," explained Claudia Nestler, Forensic Services at PwC Germany.
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The most common forms of corporate crime
The so-called boss scam is particularly widespread. It's similar to the common telephone scam where the caller pretends to be the victim’s grandchild, except that in this case the victims are not unsuspecting elderly people, but seasoned managers.
In this type of fraud, criminals contact individual employees of a company and pose as their high-ranking manager. They then ask employees to make a payment, giving the impression that the entire future of the company depends on that particular transaction. This alone causes German companies to suffer losses in the double-digit million range every year. Good fraud management can reduce the risk of such attacks.
Other offences in the area of corporate crime include tax evasion, customs offences, violations of competition law, illegal employment, subsidy fraud, corruption and espionage, as well as money laundering. The German Federal Criminal Police Office is increasingly registering violations in the area of data misuse. The reason: it is often made all too easy for employees to disclose sensitive company data or even sell it to external organisations.
What fraud management involves
Ideally, a fraud management system should be established in the company before damage occurs. It should be effective on both a technical and a corporate policy level. Damage cannot always be avoided. Therefore, fraud management comprises three dimensions:
Fraud management: prevention
Many criminal offences can be avoided with preventative measures. A code of ethics, a compliance programme or a code of conduct form a solid foundation for fraud prevention, since it is often inadequate work regulations, access controls or instructions which are responsible for the weak points in a company.
Fraud management: exposure
Has a suspicion arisen? Then the fraud management system should come into play now, at the latest: above all, internal auditing should now be asked to provide possible clues and evidence. It is not uncommon for anonymous whistleblowers to help uncover incidents. But be careful: ensure that colleagues are not wrongfully denounced anonymously. Processes and procedures for how to act in the event of detection must be defined in advance.
Fraud management: appraisal
If criminal activity has been exposed, appraisal will begin. This step is perhaps the most difficult in fraud management. Analyses must be made, forensic investigations carried out and possibly preliminary tests undertaken. During appraisal, it can be worthwhile to buy in expertise from outside.
Departments, officials and processes
When it comes to fraud management, many factors have to mesh perfectly: the company only benefits from the system if it works. Internal auditing helps to uncover internal offences, compliance provides the guidelines for employees, and screenings ensure the integrity of applicants and employees. Human resources development staff train employees and raise awareness, the legal department investigates possible breaches of the law, and an ombudsperson mediates in the event of a dispute.
Fraud management and fraud prevention in purchasing
As the aforementioned study made clear, purchasing is also affected by criminal activities, especially with regard to fraud and corruption. The often high procurement volumes contribute to the risk here. To counteract this, companies should first analyse the main risks in procurement and then implement measures to stop possible fraud at an early stage.
These measures include regular controlling of the purchasing data to identify conspicuous prices or discounts as well as conspicuous process data, for example executed orders without purchase requisitions or failure to obtain a range of quotes. If irregularities are found, an examination must be carried out, since there are often plausible reasons for such purchasing processes. In addition, to minimise opportunities for fraudulent or otherwise criminal activity, companies should take measures which make such practices more difficult for employees - for example, the introduction or optimisation of tendering processes.
The many threats facing modern companies, with their highly complex technical infrastructures, make fraud prevention and fraud management vitally important. Establishing a fraud management system requires considerable effort. However, this effort is offset by a high sustainable benefit.