Executive Fraud: What is and How to Prevent it

executive fraud

Executive Fraud: What is and How to Prevent it

executive fraudWhile fraud is often committed by employees, managers, and third parties, fraud involving C-level executives is unfortunately not uncommon. C-level executives, who typically include the CEO, CFO, COO, and CMO, among others, are often in positions of significant authority within a company, with access to sensitive financial information and decision-making power that can impact the entire organization.

According to ACFE’s 2022 Report to the Nations, fraud committed by an owner/executive causes a loss per month (velocity) of nearly three times that of fraud committed by employees and manager-level individuals. These findings demonstrate that fraud committed by those in the highest positions can harm the organization significantly faster than those in lower positions.

Basically, when C-level executives engage in fraudulent behavior, it can have serious consequences for the company, its shareholders, and stakeholders.

The ‘why’ and ‘how’ 

Despite often receiving lucrative compensation packages, some C-level individuals still commit fraud. Why is that? And how do they have the opportunity to commit fraud? 

According to the triangle theory of fraud, the ‘need’ that urges individuals to conduct fraudulent acts will always exist. These could be motivations stemming from financial crash, the desire to live a luxurious lifestyle, or debt, regardless of their positions. As for C-Level individuals, fraud can be even more possible given their power and authority in the organization.

The report explains that executives have a strategic position of authority to manipulate processes and internal controls related to fraud. In addition, they have the greatest access to organizational assets and external parties, making it easier for executives to commit fraud in the form of embezzlement, corruption, or collusion.

Executives have a high level of authority that allows fraud to go undetected for longer — the higher the level, the harder it is to detect fraud, and the longer the fraud goes undetected, the greater the loss. 

A few notable cases of fraud involving C-level executives include Wirecard, FTX, and Frank.

The key is transparency, accuracy, and accountability 

To prevent fraud by C-level executives, companies can implement a few mitigation measures, including  strong internal controls, such as:

  1. Segregation of duties – This involves separating responsibilities for different aspects of financial transactions, such as authorization, custody, and record-keeping. For example, the person who approves a transaction should not be the same person who processes the payment or records it in the accounting system.
  2. Access controls – Access to financial systems, accounts, and data should be limited to authorized personnel only, and access should be granted based on job responsibilities and the principle of least privilege.
  3. Regular audits and reviews – Regular internal and external audits and reviews can help identify potential weaknesses or deficiencies in internal controls, allowing the company to take corrective action before fraud occurs.
  4. Promoting whistleblowing program – Establishing a whistleblowing hotline for employees to report suspected fraud or other misconduct can help ensure that potential problems are identified and addressed before they escalate.
  5. Code of conduct and ethics – Establishing a code of conduct and ethics that emphasizes the importance of honesty, integrity, and ethical behavior can help create a culture of compliance and reduce the likelihood of fraudulent behavior.

These are just a few examples of internal controls that companies can implement to prevent fraud. Its concrete implementation would depend on the organization’s size, industry, and other factors, but the overall goal is to establish a strong framework of policies and procedures that promote transparency, accuracy, and accountability.

In addition, it is also important for companies to conduct thorough background checks, including performing PEP checks, reverse directorship checks, credit checks, and due diligence, before hiring C-level executives to ensure they have a history of ethical behavior and are a good fit for the organization.

 

Photo by Hunters Race on Unsplash

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