Try, Try Again: Reduce Fraud Risks to the Point of Repeated Failure

You may have heard the saying, “Figures don’t lie, but liars do figure.” This highlights that while numbers may seem objective, they can still be manipulated or taken out of context. With that in mind, let’s look at workplace ethics and how these impact fraud risks.

In the early 2000s, we saw major accounting scandals like Enron, WorldCom, Tyco, and Freddie Mac. Today, cryptocurrency schemes often make headlines. Unethical behavior and fraud happen in businesses across industries all over the world. A 2024 study from the Association of Certified Fraud Examiners (ACFE) exploring over 1,900 real-world fraud cases indicates that these crimes of deception negatively impact organizations in many ways. However, companies also suffer when they lack proper controls to catch and stop fraud.

Some key findings: While owners and executives comprised only 19 percent of fraudsters, their schemes caused losses over eight times higher than regular employees (ACFE, 2024; Choi & Gipper, 2024). Long-tenured employees who committed fraud (10+ years) cost companies $250,000 on average versus $50,000 for new hires. Surprisingly, 87 percent had clean background checks. Screening alone can’t prevent internal threats.

Based on their ACFE 2024 report, the following were extrapolated as the top five perpetrated frauds. As you read these, think about how difficult it would be for these to occur in your organization or not:

1. Billing schemes. Billing schemes represented 22 percent of cases in the study. This includes invoices submitted for fictitious goods/services or inflated invoices.

2. Theft of noncash assets. At 22 percent of cases, theft of noncash assets was also among the most frequent schemes. This includes stealing inventory, confidential information, etc.

3. Check and payment tampering. With fraudulent alterations to checks and payments representing 17 percent of cases, this scheme posed a significant risk.

4. Corruption. Almost half of all reported cases (48 percent ) involved elements of corruption, making this one of the top schemes. This includes bribery, illegal gratuities, conflicts of interest, economic extortion, etc.

5. Expense reimbursement fraud. Expense report manipulation occurred in 13 percent of cases submitted to the ACFE study, placing it among the top five. This includes claiming expenses that were never incurred, duplicate expenses, creating fake receipts, etc.

As you read this, did you find areas where there may be vulnerabilities? Within the most recent research (ACFE, 2024; Choi & Gipper, 2024), the following were identified as the weakest internal controls that contributed to occupational fraud:

1. Lack of internal controls. This was cited as the primary internal control weakness contributing to fraud in 32% of cases. The lack of proper controls leaves organizations vulnerable.

2. Override of existing internal controls. In 19 percent of cases, the fraud occurred because perpetrators could override or bypass existing controls meant to prevent fraud.

3. Lack of management review. Cited as a top weakness in 18 percent of cases, inadequate management oversight allows issues to go undetected.

4. Poor tone at the top. A lack of integrity and accountability from top management, cited in 8 percent of cases, can undermine internal controls.

5. Lack of competent oversight roles. When key monitoring roles are not staffed with suitably qualified individuals, fraud risk increases (9 percent of cases).

6. Lack of segregation of duties. Proper separation of incompatible tasks is a basic control, yet its absence still enables some fraud (5 percent of cases).

As you read this, it will seem apparent that the most frequently occurring weaknesses were related to either an absence of necessary controls or the circumvention of controls in place (Bondoc & Taicu, 2019). Ensuring strong internal controls, competent oversight, and an ethical tone from management would help address the top vulnerabilities.

Keeping your organization safe should be a priority; you must take the time to review your existing processes, find the holes, fix them, and have a plan of constant monitoring. Otherwise, it could result in costly losses.

I will leave you with another well-known saying, ‘If at first you don’t succeed, try, try again,’ which also has a disputed origin. While this quote is often used as motivational advice, your goal is the opposite in the context of fraud prevention. Your job is to ensure that those attempting fraud continue to fail, no matter how many times they try.

Arlene Ramirez, MBA, CHAE, CHE, CHIA (@ArleneDRamirez) is an HFTP Global past president. She is principal at Ascend and ADR Hospitality Consulting, and she is on the faculty at the C.N. Hilton College, University of Houston. Ramirez is also a frequent speaker at HFTP Global events and author of numerous HFTP-supported industry reports.

References

• Association of Certified Fraud Examiners. (2024). Occupational Fraud 2024: A Report to the Nations.

• Bondoc, M. D., & Taicu, M. (2019). Ethics in financial reporting and organizational communication. Scientific Bulletin-Economic Sciences, 18(3), 168-174.

• Choi, J. H., & Gipper, B. (2024). Fraudulent financial reporting and the consequences for employees. Journal of Accounting and Economics