Fraud: South Africa's

What is Fraud?

Fraud is a broad financial crime describing acts of deceit used to unlawfully take someone else's property. It is also described as the unlawful and intentional making of a misrepresentation which causes actual prejudice or which is potentially prejudicial to another.

There is a strong belief that Fraud will increase further. The reasons for this are insufficient criminal penalties, the inefficiencies of the criminal justice system, economic pressures, the increased sophistication of criminals and the weakening of society's values.

The combination of poor ethics and easy opportunities creates conditions in which Fraud flourishes. Organizations that allow empire-building or those whose operations and financial decisions are dictated by a single person or management clique, open themselves to Fraud.

Companies report that Fraud occurs due to poor internal controls and collusion between employees and third parties. It is also influenced by the type of industry in which the company is involved. Industries such as insurance, financial services and retail are considered to be high risk.

Fraud can be divided into three categories, namely employee Fraud, management Fraud and external Fraud. Examples of employee and management Fraud include inventory theft, expense account manipulation, kickbacks, purchases for personal use, falsification of financial statements and misappropriation of cash. The most frequently exposed types of external Fraud include false representation, patent infringement, false invoices and secret payments such as taking bribes and undue commissions.

Although it is often difficult to prove Fraudulent behaviour, there are some warning signals companies should be aware of. These include:

Fraud is often uncovered through internal controls, whistle-blowing by other employees and investigations by the company.

The most successful methods of combating Fraud are found within the organization. Companies can reduce the risk of becoming victims of Fraud by implementing a Fraud prevention policy, aimed at managing and reducing the risk of Fraud, as well as a Fraud response plan.

An effective Fraud prevention policy includes raising the level of awareness to the risk of Fraud and minimizing temptation, motive and opportunity. A Fraud response plan includes minimizing the risk of subsequent losses, improving the chance and scale of recoveries and minimizing negative and adverse publicity.

Other controls include:

Although Fraud as reached alarming high rates, the figures cited are only the tip of the iceberg. The statistics are based only on cases reported to the police. Often companies do not report the Fraud and prefer to handle the matter themselves, frequently employing a firm of private investigators to prove Fraudulent behaviour.