Fraud and corruption: how to catch a fraudster

By Steven Powell

Every organisation is susceptible to fraud, but some are more susceptible than others. This article provides an overview of the profile of a typical fraudster to help readers identify fraudsters operating in a business.

Organisations that are more susceptible to fraud are those with weak accounting and financial skills: they delegate control over the procurement and accounts payable functions to secretarial and accounting personnel; they rely heavily on trusted individuals; there is poor or non-existent segregation of duties, or a complete absence of independent review over accounts and reconciliations.

This makes it easy for dishonest personnel to not only misappropriate funds, but to also cover their tracks and avoid detection.

The profile of a fraudster
Research has shown that most fraudsters are older than 30, have generally worked for an organisation for five years or more, come from stable family homes, are well educated and are often the very last people that management would suspect.

Generally, fraudsters are bright, capable and persuasive, and, as you can imagine, very resourceful. Often your most capable and most trusted employee is the fraudster in the organisation.

Another disturbing factor is that, according to psychologists, approximately 10% of the population is dishonest. Organisations need to accept that a small number of their employees will be looking out for opportunities to enrich themselves at the expense of the organisation. The same psychologists also report that only 10% of the population is completely honest and ethical.

The 80% between these two extremes can thus be tempted into committing fraud as a result of pressure or circumstances. There are a number of triggers that can lead an honest employee to contemplate getting involved in fraudulent activity, but organisations are especially at risk when employees experience financial pressure.

Recognise the red flags (clues to fraudulent activity)
To catch these fraudsters, it is critically important that management is alive to the various fraud indicators that often present themselves - red flags that are symptoms or clues to potential fraudulent behaviour.

The biggest clue that companies often fail to see, even though it happens right in front of their eyes, is changes (subtle and sometimes not-so-subtle) in someone's lifestyle.

As a mechanism to detect and prevent corruption, South Africa's new president has endorsed lifestyle audits for civil servants.

When an employee appears to live significantly beyond their means, management must be vigilant and must investigate and confirm that the lifestyle change is derived from a legitimate source. The key changes to lifestyle that are very easy to identify relate to properties, motor vehicles, overseas trips and enrolling children into private schools.

There are a number of databases which provide public data that organisations can, and should, check. Additionally, forensic service providers are able to perform lifestyle audits with relative ease.

Other triggers that tempt honest employees to consider getting involved in fraud include medical emergencies, peer pressure as well as addiction (drugs, alcohol and/or gambling). An addiction can make anybody indiscriminate about from whom and from where they source funds to feed their habit.

Fraud-prevention measures
Mechanisms that organisations can adopt to protect themselves against fraud and corruption risk include performing a fraud and corruption risk assessment, and educating employees to create fraud awareness - this, in turn, will help to ensure that the red flags are recognised and fraud concerns reported to management.

It is also important for organisations to have a dedicated anonymous whistleblowing system to ensure that employees are confident that they can blow the whistle on fraud or corruption concerns, without fear of victimisation or recrimination.

Additionally, organisations must ensure that they have robust anti-fraud controls. The two most important messages that companies have to adhere to, if they are going to avoid fraud, are:
- Segregation of duties
- Regular (as well as ad hoc) oversight and review

Procurement can be a particular area of abuse. It is thus essential to have strong fraud controls in place in this area, coupled with strong oversight and monitoring.

Fraudsters are like children: if they know they are being watched, they are less likely to misbehave. Ignore them or leave them alone at your own peril.