Collin Greenland | Beware the hidden costs of fraud

According to the Association of Certified Fraud Examiners, the world’s largest anti-fraud organisation and premier provider of anti-fraud training education and certification, organisations lose about five per cent of revenue from fraud annually. Applying this estimate to the 2019 GWP (US$90.52 trillion), this equates to a whopping US$4.5 trillion loss globally to fraud. This five per cent estimate is said to be larger in developing countries like Jamaica, which means the nation lost more than J$41.79 billion of the 2019-2020 budget, $835.9 billion to loss or misuse, which could include fraud.

‘Hidden’ Costs Often Overlooked

However, since fraud losses are traditionally measured by looking at fraud transaction dollar losses and operational costs, the less obvious and harder to measure ‘hidden’ costs of fraud are often overlooked and/or are not fully appreciated. Very often, the amount lost by fraud victim organisations in both the private and public sectors, splashed across sensational newspaper headlines, do not fully indicate the true loss when eventually compared to the downstream impact of other costs incurred by the victims. Those of us who are unsympathetic to organisations who incur fraud losses should be reminded that these costs invariably are passed on to all of us as consumers of the victims’ goods or services.

The hidden costs of fraud are wide and varied, and can range from minor increases in expenditure to devastating losses of demand/income that can threaten even an organisation’s existence or future. Probably the best recognised and possibly one of the longest-standing is reputational damage, which not only harms customer/client and investor trust, but can massively erode customer base and hinder current and future sales. Damaged reputations, especially in sensitive industries such as the financial and service industries, also correlate with increased costs for hiring and retention, which adversely affects operating margins and impair higher returns. In addition, reputational damage can increase essential things such as liquidity risk, which may depress stock prices and eventually harm market capitalisation.

Increasingly, cyber fraud is being recognised as a reality in today’s increasingly technological landscape and the horror stories emerge daily of fraud losses across banking, eCommerce, travel, entertainment accounts, the list goes on. NuData Security, a Mastercard company, has determined that 70 per cent of consumers use the same password for all of their online accounts, enabling fraudsters to perpetrate schemes from automated methods like botnets, replay attacks, wireless keyboard and mouse hacking, and velocity variations. Understandably, modern online banking and other forms of eCommerce have been forced to fortify cyber prevention/detection efforts, which invariably have increased the costs of online finance transactions through authorisation/acceptance rates, and other types of transaction fees. Many Jamaican merchants have responded to these challenges by offering sale discounts on only cash purchases or just avoiding credit card or other online commerce totally.

Training

Based on their experiences, the larger organisations in both the public and private sectors are increasingly incurring additional training expenditure to sensitise employees with anti-fraud training, and specialised training in their sales, finance, accounting and internal audit personnel. The costs incurred also in implementing fraud policies, fraud risk assessments, whistle-blowing and other such anti-fraud efforts have become inescapable additions to the corporate governance mechanism for the more enlightened organisations. Other security features such as biometric human resource systems and CCTV cameras have been proven to be effective fraud fighters, but all come with costs. The impact of technology has not only enhanced the overall efficiency of Jamaican organisations, but most times must be accompanied by security/anti-fraud capabilities which come with costs incurred with factors, such as increased server bandwidth and power, server space, licensing costs, hosting costs, and labour.

The costs of fraud investigations not only add to the amount lost by the organisation to fraud, but can often exceed the amount of funds lost from the actual fraud, especially if legal, forensic and other speciality services are required. These, however, are merited since they can prevent systemic fraud risks, unknown/undetected susceptibilities, or future losses of greater amounts.

The reality is, there are two kinds of organisations – those that experience fraud, and those that have not yet discovered that they have. The sad truth is that in today’s world, fraud continues to be prevalent, inescapable and inevitable. However, organisations that fail to prioritise this risk with effective deterrence, preventative and investigative capabilities will continue to incur not only the obvious losses from fraud, but the other hidden ones that often go unnoticed.

Collin Greenland is a forensic accountant. Contact: cgreeny.collin@gmail.com