Here's a current discussion thread within the Fraud Prevention Network group at LinkedIn. It's of immense value and I thought I should copy and paste the thread here as is. Alon posed the question: The other members and I tried our best to answer. You can join the group and follow the discussion here http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=44358851&gid=1083937&commentID=32416374&trk=view_disc
How do you measure the loss from Internal fraud?
Many of my clients ask me: "How can I know that by investing in internal fraud prevention I am saving the company money?" I can show them all the statistics in the world, but is there an answer to this question? I would love to hear your thoughts.
7 comments
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Alex Gaft (MBA, CFE, CISA) • Show them again statistics, that average annual loss due to fraud is around 6% of annual earnings. Then ask if they are ready to pay you 6% of all money, that you prove were lost by them as a result of internal fraud. If they refuse, then they do believe in statistics about loss from internal fraud.
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Alon Spitzer • Thank you Alex. is 6% a good number across all industries? is banking same as retail?
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Abiodun Akintebi • The measurement of the internal fraud is a function of the prevailing control system and the extent to which the vulnerability in the system is exploited. In order words, where it appears that the company has an ineffective control system; the value of internal fraud would then be the consequence of the weak control system.It is not restricted to cash; it could include the effect on the corporate image, staff orientation, and the corporate governance of the company.
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Neil Tyson • Do a baseline fraud and error loss measurement exercise - this will give a useful number to start talking in real times about a proportionate level of investment in counter fraud activities, as well as giving a baseline from which to measure success around targets for reducing losses.
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Alex Gaft (MBA, CFE, CISA) • From ACFE 2010 Report to Nation:" Survey participants estimated that the typical organization loses 5% of its annual revenue to fraud. Applied to the estimated 2009 Gross World Product, this figure translates to a potential total fraud loss of more than $2.9 trillion". Worldwide statistics from 2008-2009.
Caleb Mutsumba • That's a crucial decision process question, Alon. I have realized that with many a client the 6%/turnover statistic is an interesting discussion point. At the end of the day it doesn't answer the ubiquitous question: "How can I know that by investing in internal fraud prevention I am saving the company money?" To many people the 6%/turnover statistic is abstract - far away from them and their immediate needs/wants. Whether this is reality or perception is irrelevant: We act on perception. In answering that question we have to be addressing a concrete and present danger. It is not an easy question; yet it is the one question towering between a consultant and his/her winning an assignment or relationship or trust. Long story short, I have found that sharing industry "war stories" (on a no names basis, of cause) does help. Everyone wants to know how other similarly predisposed people are coping. It helps when some of these past conquests have been published so you can add flesh to the published skeleton and show how/why fraud prevention could have worked to circumvent the crisis.
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Dave McKnight, MBA, CIA •
My only suggestion would be to turn the question around and let them answer it. “So if one of your accounts payable clerks found a way to write him/herself checks without being caught, how much do YOU think you would lose?”