Earlier this year, the Association of Certified Fraud Examiners published Occupational Fraud 2024: A Report to the Nations (Report to the Nations), which asserted that organizations across the globe lose 5% of revenue to fraud annually.
The biennial update has consistently reported the 5% estimate for decades, based on real cases involving organizations of all sizes from diverse industries. The Report to the Nations helps leaders and organizations benchmark their anti-fraud prevention, detection and response efforts.
Occupational fraud is loosely defined as fraud committed by an individual against their employer leveraging their position of trust. While emerging technology entities are not discussed specifically within the report, we can consider the overarching themes and findings consistent across all organizations to guide our efforts to combat fraud in the sector.
Emerging technology companies are synonymous with being agile, responsive to feedback and comfortable leveraging the newest tools and technology to achieve operational goals and growth. Those same attributes are valuable when designing controls to prevent, detect and respond to fraud, but some limitations found in emerging technology companies – such as small teams, constrained expenses and a lack of robust financial systems and controls – may create opportunities for fraud.
While not surprising, it’s important to note that a key finding of the Report to the Nations is that anti-fraud controls are associated with lower fraud losses and quicker fraud detection. The report also finds that more than half of occupational fraud is due to a lack of internal controls or an override of existing controls. Despite the challenges of implementing anti-fraud controls in emerging technology companies, the report findings show many benefits to working through them.
The fraud threat landscape can change quickly for any business. The ability of an organization to identify weaknesses and put controls in place to mitigate risk is vital to a properly functioning finance group. In the early stages of its lifecycle, an emerging technology company may lack the human capital to staff an accounting or finance department in a way that allows them to segregate duties. Relying on individuals outside the group is one way to combat that shortcoming. The Report to the Nations states that 21% of cases with a median loss of $141,000 were reported by organizations with 100 employees or less. While the percentage of cases was the lowest, based on segments grouped by number of employees, the median loss was higher than all but the largest group of 10,000 or more employees, which indicates that despite the smaller size of the organizations, there’s a real risk of loss related to fraud for smaller organizations.
As the business grows and back-office staff is hired, controls that were in place and effective may become outdated. Personnel changes may cause segregated duties to overlap or misalign given the roles within the group. Logins and passwords used to access systems designated for a particular person may be shared, allowing for them to be exploited. Background checks focused on design, engineering or product credentials may ignore questionable financial acumen or trustworthiness.
Emerging technology companies, however, may benefit from their interest in technology and ability to leverage new tools. More established organizations may be reluctant to employ the latest technology because it’s not scaled to enterprise levels needed by a larger group, but they may be nimble and willing to customize to meet the needs of a strategic customer.
The threats related to fraud for emerging technology companies are unique to the industry and to the specific factors in place at the organization, but a thoughtful approach guided by the data available in the Report to the Nations is an excellent way to combat threats.
At Schneider Downs, we have years of experience helping organizations respond to potential fraud and developing anti-fraud programs to catch fraud before it happens. If you have questions or concerns, please contact James Rumph in our Columbus office or Tom Pratt and Brian Webster in our Pittsburgh office.
About Schneider Downs Business Advisory
Our experienced team of business advisors, consisting of Certified Fraud Examiners (CFEs), Certified in Financial Forensics (CFFs) and Certified Mergers and Acquisition Advisors (CM&AAs), leverages their industry expertise to maximize value and minimize risk proactively or during acquisitions, litigation, arbitration, corporate reorganization and other major business transactions and transitions. To learn more, visit our dedicated Business Advisory page.
