Fraud is often associated with external intruders or sophisticated hackers. However, a significant threat to any business might be sitting quietly in a cubicle. Long-serving employees, in particular, can pose a serious risk of internal fraud.
The Role of Internal Controls
For governance to effectively deter fraud, internal controls must be rigorously enforced and visibly supported by top management. Simply having these controls in place is not enough. Internal fraud thrives in environments where technology and internal controls are not adequately adapted to new threats. This applies to large corporations, privately-owned businesses, and SMEs alike.
Technology’s Impact on Fraud
Technology has evolved significantly over the past decade, making it easier for employees to commit internal fraud. Today, it is possible for a company to receive a fake invoice or bank statement that appears legitimate at first glance.
Challenges of Remote Working
Before the Covid-19 pandemic, companies had strong controls for office-bound staff, requiring paper-based or online requests for various processes. The sudden lockdown on March 27, 2020, forced companies to quickly adapt to remote working without time to adjust controls. This led to compromises in internal controls, as employees found excuses to bypass them, such as when processing payments from home.
The Risks of Hybrid Working
Internal controls have often weakened under hybrid working conditions. Digitalization has increased the speed of operations, making it easier for businesses to lose security amidst the flood of data. Auditors are trained to be skeptical, but management’s focus on empowering employees can obscure the need for thorough ethical and moral evaluations of staff.
Gradual Escalation of Fraud
Fraud often starts with minor infractions, like wasting time on social media or stealing stationery. This behavior, if unchecked, can escalate to more significant theft, including cash. When controls are lax, a seemingly trustworthy employee can become a fraudster.
Impact of Economic Conditions
Economic hardships, such as rising poverty and unemployment, can push employees into desperate actions. An employee, suddenly the sole breadwinner, may exploit their insider knowledge to commit fraud if they perceive weak controls and unsuspecting management.
Changing Organizational Culture
To combat internal fraud, management must foster a culture of vigilance and integrity. Staff should observe management conducting daily checks and reviews at all levels. Employees must know that their work will be scrutinized, making even minor unethical behaviors detectable.
Tightening Controls and Leading by Example
Companies need to adopt a zero-tolerance stance on unethical behavior, starting with top management. Leaders must set an example by maintaining high ethical standards and addressing inappropriate behavior both inside and outside the workplace, including on social media. The company’s reputation can suffer from employees’ personal conduct.
In summary, internal fraud often stems from weak controls and poor oversight. Strengthening internal controls, adapting to technological advancements, and fostering a culture of integrity are crucial steps in protecting a business from internal threats.
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