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Internal fraud eat up five percent of a company’s turnover

Internal fraud eat up five percent of a company’s turnover

By Donnie Mark Lund and Sarmad Reda, Partners in 1DigitalTrust

(This article was first published in Danish language in Børsen)

The Danish National Audit Office under the danish parliament (Rigsrevisionen) has just concluded that the management frameworks of most danish ministries were inadequate for the purposes of preventing fraud committed by public-sector employees concerning procurement and payments of grants and salary.

Unfortunately, it is a utopia to think that the situation should be much better in the private sector.

The latest report from the international anti-fraud organization ACFE states that an average of five percent of a private company’s turnover disappears into thin air as a result of employee fraud and scams.

That number covers both financial fraud, bribery and improper use of materials, equipment, vehicles and more.

Five percent is a lot. It would raise the bottom line and stock price of many companies if at least some of the five percent could be minimized.

Segregation of Duties

But how can fraud be reduced?

Here, ACFE points out that lack of internal controls is a contributing factor to one-third of fraud. So it’s an obvious area of focus.

Another thing that the Danish National Audit Office (Rigsrevisionen) also recommends is to ensure well-functioning Segregation of Duties, so for example it is not the same person who both pays an invoice and registers the same invoice in the system.

And there must be control of user access and authorizations in IT systems and logging of user activities.

The list above is not exhaustive, but provides a good starting point.

If you choose to make an effort based on the potential financial gains, then the implementation of system-supported Segregation of Duties can prove to be the most profitable investment in 2021 for any companies.

According to the ACFE, an average fraud case is only discovered after 14 months. It costs the company an average of 7.700 USD a month, and three out of four cases is done by a man.

And even though only 20 percent of the fraud are committed by an owner or top executive, the cost of managerial fraud is ten times as high as non-executive employee fraud.