Billions of rands are lost annually due to fraud. It is considered to be South Africa's number one financial crime - the police force are currently investigating financial crimes totalling more than R7,8 billion.
The Commercial Branch of the South African Police report that fraud increased by 77% between 1986 and 1992. The SAP estimate that during 1996, 66% of the country's companies were hit by fraud. Employee fraud accounted for almost three-quarters of this figure. Most of the guilty employees were in management positions.

The majority of fraud cases occur in the industrial sector, followed by financial services companies. Attorney fraud amounts to about R15 million and the public sector looses R8 Billion annually to fraud. Companies report that the most costly fraud cases include false invoices, false representation, bribes, product theft and patent infringement.

Not as costly, but far more common, is credit card and cheque fraud. This includes cheque forgery, asset management fraud and accounting irregularities.

What is fraud?

Fraud is a broad financial crime describing acts of deceit used to unlawfully take someone else's property. It is also described as the unlawful and intentional making of a misrepresentation which causes actual prejudice or which is potentially prejudicial to another.

Reasons for fraudulent actions

There is a strong belief that fraud will increase further. The reasons for this are insufficient criminal penalties, the inefficiencies of the criminal justice system, economic pressures, the increased sophistication of criminals and the weakening of society's values.

The combination of poor ethics and easy opportunities creates conditions in which fraud flourishes. Organisations that allow empire-building or those whose operating and financial decisions are dominated by a single person or management clique, open themselves to fraud.

Companies report that fraud occurs due to poor internal controls and collusion between employees and third parties. It is also influenced by the type of industry in which the company is involved. Industries such as insurance, financial services and retail are considered to be high risk.

Types of fraud

Fraud can be divided into three categories, namely employee fraud, management fraud and external fraud. Examples of employee and management fraud include inventory theft, expense account manipulation, kickbacks, purchases for personal use, falsification of financial statements and misappropriation of cash. The most frequently exposed types of external fraud include false representation, patent infringement, false invoices and secret payments such as taking bribes and undue commissions.

Uncovering fraud

Although it is often difficult to prove fraudulent behaviour, there are some warning signals companies should be aware of.

These include:

• a lifestyle above an employee's financial means
• stock reconciliation problems
• excessive expenditure which has not been investigated
• unusually large deposits
• manipulation of internal debtor accounts
• the hesitance of employees to take leave
• Fraud is often uncovered through internal controls, whistle-blowing by other employees and investigations by the company

Combating fraud

The most successful methods of combating fraud are found within the organisation. Companies can reduce the risk of becoming victims of fraud by implementing a fraud prevention policy, aimed at managing and reducing the risk of fraud, as well as a fraud response plan.

An effective fraud prevention policy includes raising the level of awareness to the risk of fraud and minimising temptation, motive and opportunity. A fraud response plan includes minimising the risk of subsequent losses, improving the chance and scale of recoveries and minimising negative or adverse publicity.

Other controls include:

• establishing a code of conduct
• credential and character checks on new employees
• reviewing internal controls
• training courses in fraud prevention and detection
• staff rotation policy

Although fraud has reached alarmingly high rates, the figures cited are only the tip of the iceberg. The statistics are based only on cases reported to the police. Often companies do not report the fraud and prefer to handle the matter themselves, frequently employing a firm of private investigators to prove fraudulent behaviour.