Who poses the greatest threat – and why – for fraud?
Draper: The simple answer is: the person we least expect. You’d never hire someone if we thought they’d defraud the organization. Most of us go about our workdays with honesty and integrity, and we like to think the same of everyone else. But some people find themselves facing significant financial pressure and can talk themselves into thinking that fraud is the best way to relieve that pressure. That’s why fraud is so damaging to organizations. The financial consequences can be bad enough, but the erosion of trust is devastating to culture.
Tell me some of your statistics regarding fraud by gender and why men are more prevalent in cases of fraud?
Draper: Our recent study found that men were convicted of major frauds at a rate of four times that of women. And the median dollar value of fraud losses grows rapidly with offenders aged 50 and older.
Maybe this says something about the situational ethics of men or their willingness to take risks – thinking the personal financial gains from fraud outweigh the likelihood of getting caught.
Maybe it says the courts are harder on men than they are on women.
But more likely it’s a function of opportunity. There’s lots of information out there showing that men are overrepresented in senior management roles. It’s the senior employees who have gained the trust of their organizations and have the authority needed to override internal controls and conceal their frauds. Concerned employees can be reluctant to raise allegations against senior managers.
All this allows the fraud to happen in the first place and to go on for a longer period, increasing the losses.
I think that as we see an improved gender balance in senior corporate roles, we will see a shift in the gender-related fraud conviction stats.
What can companies and organizations do to protect themselves against fraud?
Draper: Again, we come back to the idea of the opportunity to commit fraud. Companies need to think about how they can reduce their risk of becoming a victim. The first thing to remember is that it can happen to you, even if you know and trust your employees.
Your stakeholders will judge you not by the fact that fraud has happened, but by the degree to which you took reasonable steps to manage the risks. Make sure you have effective policies and procedures in place to prevent and detect fraud.
Directors should not be afraid to ask questions of senior management; your obligation to protect the organization outweighs a desire to avoid ruffling feathers. Your internal controls are about managing fraud risks regardless of the people working in any given role.
A critical element of your fraud risk management program is a whistleblower hotline or similar program. Your loyal and honest employees need a confidential channel to safely raise ethical concerns. Those tips are the single most effective way or uncovering fraud inside an organization.
Can you talk about the link between the age of the fraudster and how much money a company loses?
Draper: Our research found a link between the age of the offender and the size of the loss, as well with the nature of the fraud. Frauds involving billing schemes and the theft of cash and inventory were linked to employees aged 50 and older, and resulted in greater losses. Our experience investigating these types of frauds confirms this, as it usually involves senior employees with the opportunity to override controls and approve their own fraudulent transactions.
We also found that payroll frauds were spread evenly across age groups. We find these frauds are often perpetrated by more junior staff and generally have a lower loss on a case-by-case basis.
The data shows that the largest losses are linked to investment frauds like Ponzi schemes, which are perpetrated by the oldest offenders. Victims of these frauds are more often individuals than businesses. The stereotypical offender here is the Bernie Madoff type; a senior, well-established, trusted adviser who makes off with the life savings of his victims.
The impact of those frauds is truly tragic. Helping clients recover even some of their losses and seek justice is perhaps the most rewarding work I do.
How big of a problem has this issue become for companies in Canada?
Draper: A common estimate in fraud fighting circles is that fraud losses represent five per cent of top-line revenues for companies.
Think about that for a minute. Even in the best economic times, imagine the positive impact of adding five per cent to your top line with no associated cost of sales and virtually no administrative expenses. There’s a lot of attention being paid to cyber threats these days – rightfully so – but the fraud risks inside your company haven’t gone away.
Fraud is about telling lies for money, so as long as you have people and assets, you have fraud risks.
The process of implementing a fraud risk management program is an investment, not a cost. It’s a valuable tool to communicate a commitment to ethics throughout your organization; your shareholders, suppliers, customers, regulators, and best employees will appreciate it.