In recent years, we have been living in uncertain times due to the health crisis, the threat of a global recession, and supply chain disruptions, among others. Inevitably, these periods of uncertainty are marked by an increase in fraud risks within organizations from all sectors.
The impact of fraudulent acts varies depending on the type of fraud and the size of the company affected. But the impact of fraud goes far beyond financial loss. Understanding these issues helps organizations to make more informed decisions about the fight against fraud.
The fraud triangle
Observers note three common factors in fraud cases: the existence of pressure or incentive, perceived opportunity and rationalisation. These form the fraud triangle.
The health crisis is one of those events in which an increase in fraud and cybercrime has been noted. Moreover, according to a study conducted by Inferensia among companies in France in 2021, 50% of the companies surveyed noticed an increase in attacks following the implementation of teleworking.
Indeed, during this particular period of uncertainty, the elements of the fraud triangle were exacerbated, paving the way for fraudulent activities:
The incentive – Difficulty in meeting financial targets could have caused employees to engage in unethical behaviour.
Rationalization – With jobs at risk, the temptation to falsify information may have seemed rational.
Opportunity – In a climate of economic losses and mass layoffs, all primary resources were focused on the survival of businesses. Other issues, such as internal control, took a back seat.
The most common types of fraud within companies are accounting fraud, customer fraud, asset misappropriation, bribery and corruption, and cybercrime. According to our study, phishing is the number one type of fraud attempt. We noted that 47% of the companies surveyed have been victims of fake president fraud, 46% of fake supplier fraud and 38% of fake employee fraud.
Regarding cyber attacks, 32% of organizations reported attempted intrusions into their computer systems, 21% reported ransomware and 8% experienced attempted data theft or destruction.
How fraud impacts the activities of companies?
Direct financial loss is one of the major risks for any company that falls victim to or commits fraudulent activities. While the value of losses depends on the fraud committed, on average, 1 in 3 companies would have suffered a loss of more than €10,000 from fraud cases in 2021. Other financial losses, such as costs incurred for investigation and remediation procedures, are also likely.
Fraud and cybercrime also cause collateral damage other than financial loss. In particular, it affects:
Employees are among the first victims of the effects of fraud. According to numerous studies conducted among companies, employee morale is at its lowest when the company they work for is involved in a fraud case or suspicions of fraud. A drop in productivity and departures in particular can then increase, contributing to the weakening of the company.
In business, stakeholders are increasingly intent on dealing with companies that uphold values of integrity, transparency and honesty. The emergence of a fraud case within a company calls these standards into question and scares away business partners or potential investors. This results in a loss of business opportunities and competitiveness. Relations with regulatory authorities also deteriorate as a consequence.
According to a World Economic Forum survey of CEOs and leaders of organizations around the world, corporate reputation is a more important measure of success than stock performance, return on investment and even profitability. A strong reputation inspires confidence in investors, potential recruits, customers and regulators and boosts business.
Legal proceedings following cases of fraud or the uncovering of unreliable internal control systems, among others, can cause irreparable damage to a company’s image and brand. It becomes difficult for the company to retain its employees and customers while current shareholders are disillusioned. Reputational damage threatens the very existence of companies.
How to prevent fraud attempts?
No company is immune to fraud. The criminalization of bribery and fraudulent acts in the private sector under criminal and civil law is one strong deterrent. However, every company has a duty to put in place internal measures that ensure integrity and ethics.
- Build a culture of zero tolerance policy for fraud
Top management must “set the tone” by having an ethical behaviour and adopting a reactive as well as proactive approach to fraud risks. This helps establish a climate of trust within the company where any fraudulent act can be reported and will be punished. Moreover, in 80% of cases, frauds are thwarted by personal initiative or human reaction.
- Know your “enemies”
Fraudsters can be internal sources, particularly junior staff and middle management, or external sources, such as customers, hackers, suppliers, or a collusion between the two groups. In a study published in 2022, PWC notes a rise in threats from external attackers. The fight against fraud must therefore be adapted to these fraudsters who are beyond the reach of the company’s management.
- Think data-driven strategy
In an era of digitalization of activities and services, it is essential to improve one’s digital tools and skills, notably by:
- Adopting a data strategy: centralizing data enables the detection of patterns of fraudulent activity and the reporting of breaches.
- Consolidating technical and IT security: 47% of companies are already doing this.
Kantik. Fraud & Cybercrime in companies in France : Key figures. 2021. Spoking Polls & Heuler Hermes.
PricewaterhouseCoopers. The Global Economic Crime Survey. 2022.
PricewaterhouseCoopers. The Global Economic Crime Survey. 2009.