What is fraud costing SA businesses?
In our fourth article in the series on forensics and fraud, we take a look at what fraud is costing South African businesses and shed light on some of the most common kinds of fraudulent practices.
The latest SA fraud figures, available from 2017, reflect that fraud is costing South African businesses R10 billion annually. Given that those figures were up 30% from a previous report, we can only imagine that the 2019 figures are even more alarming. Our economy is struggling as it is, and with fraud being commonplace, it makes it even more difficult for businesses to stay in the black.
A 2019 South African Consumer Spending Report[i] reveals that despite growing unemployment, increasing food and fuel prices and negative savings, consumer spending has gone up to its highest level yet – R1 961.051 billion. People have to get the money from somewhere to fund their spending. Is it any wonder that fraud is on the increase?
This is especially relevant to people in senior management positions who think they need to maintain a public image of great wealth to prove their success. An economic crimes survey conducted in 2014 by an international assurance and tax advisory company highlighted that 77% of financial business crimes were committed by people in senior management positions. Too often when directors can’t keep up with their expenses, they’ll look for ways to dip into company funds to pay for their extravagant lifestyle. Initially it may even be with intention to repay the funds. But it’s a slippery slope and soon they may find themselves and their business in massive financial trouble.
“Is it any wonder that fraud is on the increase?”
What is even more alarming is that a profile on fraudsters highlights that they are usually employees who have been with a business for more than 10 years, have a university degree and are male, aged between 31 and 40 years. So, possibly that trusted employee who is never absent. It may not be such a good idea to give them free reign in the business after all. Often fraud is uncovered when a supposedly loyal employee has been forced to go on leave and the person filling in discovers that things don’t add up.
The most common types of fraud
While embezzlement and cybercrimes are the ones that most often make the news, it’s the other types of crimes that place South African businesses at greatest risk. For example, employee theft, which doesn’t necessarily have to involve cash, but can include the theft of inventory, office supplies, or even company fuel. Any time that there is misappropriation of company assets, it’s fraud.
Skimming is when employees take money from clients but don’t record the receipts. Writing out double cheques is another tactic. Two cheques are made out, one goes to pay the supplier, the other to the fraudster, while the full amount is recorded in the books as a payment to the supplier. There is a reduced risk of this these days, as cheques are rarely used. But new opportunities are created when old ones become obsolete, as is the case with cybercrime involving online payments. Hackers can be quite convincing and creative when it comes to accessing bank accounts by committing identity theft – an area where most businesses are at risk.
To many people, pay-offs and kickbacks may simply be a way of doing business, but in reality, it is fraud. If a company is getting awarded contracts as a result of a preferential relationship from an employee and shows their appreciation in the form of a gift, be it monetary or otherwise, it’s considered fraud.
“… no business is immune to fraud.”
What this demonstrates is that no business is immune to fraud. Fraudsters are savvy, and they are using technology to target potential victims. Having checks and strong security measures in place is the only way to reduce risk. And these checks start with thorough employee screening. Even with longstanding employees, no-one should be given unchecked access to company information or assets. Sometimes working with large sums of money is simply too tempting and working alone makes it easier to hide fraudulent activities.
The cost of fraud can be high, not only financially, but also in terms of business reputation. When this is taken into consideration it is well worth conducting a risk analysis so that checks can be put in place to more effectively prevent fraud. For more insights into fraud prevention, read Is my company at risk of fraud?.