While most corporations are hesitant to admit it, fraud initiated by a company’s own employees is quite common — and incredibly expensive. Research earlier this year found corporate fraud to be at record-high levels. Estimates from the Association for Financial Professionals (AFP) found that more than a third of fraud attacks on the enterprise came from within the organization itself.
The type of fraud an employee may deploy varies greatly, from a seemingly benign inflation of figures on expense reports, to misuse of corporate cards or even the sale of company information and passwords.
Though difficult to detect, internal fraud has a massive impact on the bottom line. A report from Statistic Brain published in September calculated employee theft amounts to $50 billion every year, with 75 percent of employees surveyed admitting they have already stolen from their employer at least once.
One of the broadest threats of internal fraud hides in the accounting department. Toshiba, Oracle and Tesco are just a few of the major corporations who have been hit with accounting and financial reporting scandals in recent years, a problem that the Anti-Fraud Collaboration says can affect any company.
“No organization is immune to the risk of financial reporting fraud, but all companies can take necessary steps to mitigate such fraud, including encouraging employees to report misconduct, identifying the delinquency earlier in the process and maintaining the integrity of financial reporting going forward,” said Richard F. Chambers, president and CEO of the Institute of Internal Auditors, in a statement issued this month.
Chambers spoke on behalf of the Anti-Fraud Collaboration, which was formed in 2010 in conjunction with the Center for Audit Quality (CAQ), Financial Executives International (FEI), the Institute of Internal Auditors and the National Association of Corporate Directors (NACD). The Anti-Fraud Collaboration recently published a report outlining best practices for corporations to combat financial reporting fraud after holding roundtable discussions with its members to explore how businesses can protect themselves from this threat.
Fear of Retaliation
One of the biggest deterrents to fraud prevention, the experts noted in their report, “Encouraging the Reporting of Misconduct,” is that often employees fear retaliation in the workplace if they speak out against suspected fraud — which poses a major barrier to fraud detection, the Collaboration noted, as employees are the first (and often best) line of defense against fraud.
“Next to preventative measures, the best defensive tools leadership has to mitigate damage related to financial misconduct are the eyes and ears of their teams,” said FEI President and CEO Andrej Suskavcevic in a statement. “Establishing a corporate culture that respectfully embraces the reporting of perceived misconduct — together with proper and clearly communicated investigative procedures — can dramatically affect the willingness of staff to participate.”
According to the Ethics & Compliance Initiative’s Global Business Ethics Survey, outlined in the Anti-Fraud Collaboration’s report, more than a fifth of employees around the world said they face pressure to compromise standards in the workplace. About a third said they have observed suspected misconduct, but that doesn’t mean it always goes reported: Nearly a quarter of U.S. workers, for instance, did not report their suspicions, researchers found.
Further, more than half (53 percent) of U.S. workers who did report misconduct said they experienced workplace retaliation for being a whistleblower.
According to the Anti-Fraud Collaboration, there are a few key factors that discourage employees from speaking up: a lack of confidence that upper management will back them up, the presence of intimidating personalities on the workforce, general mistrust in the workforce, “excessive” team loyalty, a lack of sound internal policies and procedures and a perception that even if misconduct is reported, the issue will not be addressed.
Employees fear retaliation by coworkers, and even termination, if they report suspected fraud, the report added.
“One of the most effective things boards of directors can do to promote a healthy working environment is to step up their oversight of company culture,” said NACD President and CEO Peter Gleason. “That begins with encouraging management to define its unique culture and communicate it properly to all levels of an organization.”
In another statement, CAQ Executive Director Cynthia Fornelli added that the report should spark dialogue within organizations and even among its direct partners.
“Our hope is that the outcome of the roundtable discussion and report will serve as a catalyst for continued dialogue among financial reporting supply chain participants, the investing public and other interested parties,” Fornelli said. “Those who observe misconduct should be encouraged to report their observations, and we hope that the report will provide concrete ways companies can provide a safe environment for them to do so.”