Relevance of Ethical Lines

Relevance of Ethical Lines

The Impact of Fraud on Organizations

Fraud can be divided into two major categories: organized crime and occupational fraud. While the former includes maneuvers like identity theft, smuggling, and extortion, occupational fraud involves activities such as embezzlement, various forms of corruption like bribery, and fraudulent statements, including deliberate tax evasion.

According to estimates from the ACFE (Association of Certified Fraud Examiners), headquartered in Austin, Texas, USA, occupational fraud accounts for approximately 5% of the GROSS revenues of public and private organizations worldwide.

On the other hand, economist Moisés Naím estimates that organized crime controls around 10% of the global Gross Domestic Product (GDP).

To differentiate between organized crime and occupational fraud, we can say that we are dealing with organized crime when there is an external attacker victimizing multiple organizations/people or when there is a criminal organization with its organizer outside the company. However, there might be accomplices within the victimized organization.

Conversely, organizational fraud is orchestrated by one or more employees of the company, who may sometimes have the complicity of counterparts within the organization, such as customers or suppliers.

Given these figures, it is evident that fraud is a scourge that organizations cannot afford to ignore.

Importance of Reporting Lines or Ethical Lines: It may be surprising, but over 40% of fraud cases come to the attention of organizations through reports when suitable channels are available for reporting. The main reasons for this are as follows:

Off-book fraud: Events like bribery payments or the coercion to obtain them do not get recorded in accounting. At most, auditors may find "suspicious" transactions, such as direct and urgent awards that do not appear necessary. However, if the affected individuals find a suitable channel to report what happened, they will often do so.

The observer effect: People, both honest and dishonest, improve their behavior when they know they are being watched by an authority. Just as the presence of teachers immediately improves the behavior of primary or secondary school students, the same occurs with fraudsters. However, as students care less about being observed by their peers than by teachers, the same happens in organizations. Consequently, honest employees may become aware of behaviors they find reprehensible among their colleagues and, especially, their superiors. At some point, they will report them if they have a suitable means to do so. In the next article, we will analyze what we mean by "suitable means."

With SHOGUN Ethical Line, you can mitigate the cost of fraud in your organization.

Author: Guillermo Casal
International consultant and trainer in fraud prevention and investigation and anti-money laundering. He is a Certified Public Accountant, holds a Master's degree in Economics and Administration, and has six international certifications, including the CFE (Certified Fraud Examiner), CIA (Certified Internal Auditor), and CISA (Certified Information Systems Auditor).