Governance, Risk and Compliance

Systemic Fraud: What to Look Out For

March 24, 2015

Systemic fraud is one of the cornerstone risks that every business should look out for, regardless of whether it’s a small 10-person shop or a mammoth 10 million employee corporation. There will always be people looking to cut corners to expedite operations, but this sloppiness can leave businesses open to significant risks.

The Minnesota Society of Certified Public Accountants recently discussed system fraud risk and how it affects every business, regardless of their industry. Internal audits should work toward developing controls that govern these areas and prevent systemic fraud from occurring when possible.

Defective Compensation Systems

Compensation is a touchy subject at many businesses, with the way people are compensating greatly affecting the output of their work and the results of their actions. For instance, if someone is only paid commissions based on sales, they may exaggerate or even lie to customers to secure the sale. This can later affect the company in a negative way. A popular example of this is Domino’s “30 minutes or it’s free” guarantee that was popular a few years back. This system encouraged drivers to get pizzas to their customers promptly, but resulted in a $2.8 million lawsuit after one of the pizza chain’s employees hit a woman in a cross walk.

Management Benefits

It’s not uncommon in movies to see the inept business manager start charging personal expenses to company accounts to pay for them. Unfortunately, this type of action isn’t limited to the movies and this “it’s my company and I can do what I want” attitude is prevalent at many firms. This is illegal and executives should not be able to take such action without deliberately violating established systems of internal controls. It’s up to internal audit to set the right systems in place that not only discourage such action, but make it immediately obvious if it does occur.

Think Industry Specific

There are also industry-specific instances that businesses must be aware of. For example, many companies encourage customers to write positive reviews of their businesses on social sites. They hope that such reviews will drive new customers and improve revenue. For some entrepreneurs, there is temptation to pay people to write fake reviews. As MNCPA notes, Google recent deleted more than 2 billion fake reviews from music sites. Not only is this a bad practice, it speaks a lot about the management who paid for such an activity in the first place.

If you are looking to learn more about preventing systematic fraud from happening in your organization, contact our team today. 

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