Knowledge

Industries Most Susceptible to Fraud

Rehana MoosaBy Rehana Moosa

Certain industries are more susceptible to fraud than others.  The nature of their operations are such that the risk of fraud is higher.

 

The Association of Certified Fraud Examiners prepares an annual Report to the Nations, which lists the industries that experience the most fraud, both in terms of the number of cases and dollar losses.  According to the 2020 report, the industries that experience the most fraud are:

 

NUMBER OF CASES OF FRAUD

DOLLAR LOSSES DUE TO FRAUD

1.  Banking and financial services

1.  Mining

2.  Government

2.  Energy

3.  Manufacturing

3.  Real estate

4.  Health care

4.  Telecommunications

5.  Energy and Retail

5.  Construction

 

One would assume that the more frauds an industry experiences, the higher the dollar losses resulting from those frauds.  However, the lists above show that this is not the case.  If industries have high rates of fraud, such as banking, they may implement strong internal controls in response, which allow the frauds to be detected before they continue for long periods of time, thereby preventing high dollar losses.

 

Also, the nature of certain industries is such that even one fraud scheme can result in large losses.  For example, one of the most common frauds in the construction industry involves bid-rigging.  This occurs when a vendor bribes an employee within the organization who has requested the bid, to ensure that the vendor wins the project.  Since construction companies are often involved in large dollar value projects, one bid-rigging scheme can result in a large loss.

 

Why are certain industries more susceptible to fraud than others?

 

  • Some industries provide easy access to employees to valuable assets such as cash and inventory.  This can be the case in the manufacturing industry, where inventory can be stolen by employees working in the warehouse.  Depending on the strength of internal controls, stolen inventory may not be detected for some time, especially if the accounting records can be altered to conceal the theft.
  • Employees are in a unique position within an organization in the sense that their in-depth knowledge of the business allows them to understand where internal controls are weak, and how those weaknesses can be exploited.  For example, imagine a manager in a construction company who is responsible for purchasing supplies and has an authorization limit of $20,000.  The manager incorporates a business and sets it up as a vendor of the construction company.  The manager issues invoices through their corporation, all totalling less than $20,000.  This ensures that the invoices will fall within the manager’s approval limit, allowing them to be paid without any oversight.
  • Certain businesses still engage in a large volume of cash transactions, and the amount of cash kept on hand can be tempting for employees to misappropriate.  This is a common issue in the retail industry, where stores accept cash for purchases, and employees operating the register can easily take cash as it is received from customers.
  • Some industries operate in environments where internal controls are weak or are often not implemented.  For example, in the mining industry, corruption is rampant since they often must operate in countries where officials require bribes to approve work permits, allow employees to enter the mine site, or even allow supplies and food to be delivered.  Mining activities are also sometimes carried out in remote areas, increasing the pressure on businesses to pay whatever is necessary to secure the resources needed to continue operations.  In these cases, internal controls to prevent or detect corruption can be weak since paying bribes is often seen as necessary and normal part of doing business.

Organizations that operate in industries that experience high levels of fraud can take steps to limit the risk. 

 

The first step is to conduct a fraud risk assessment, which identifies the areas of the business that are most at risk of fraud.  Once the risks have been detected, strong internal controls in the areas that are highest risk can be very effective in both detecting and preventing fraud.  Business owners can also research the types of fraud schemes that are most common in their specific industries, and ensure that internal controls are in place within their own organization to catch those frauds, should they occur.

 

Once internal controls are implemented, they should be evaluated on a regular basis to ensure they are still effective and operating as expected.  As technology evolves and risks change, internal controls will also need to be updated.

 

Contact us to learn more.   647-426-0146  |  rehana@rmforensics.ca

Communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. For permission to republish this content, please contact Rehana Moosa Forensic Accounting Professional Corporation.

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