Study provides snapshot of workplace fraud’s heavy cost

By The Star Staff

Puerto Rico has lost the equivalent of 3.5 percent of its 2018 gross national product (GNP), which was $68 billion, and the government lost the equivalent of 5.3 percent of its $8.6 billion contribution to the 2018 GNP because of occupational fraud, according to a study presented Wednesday by the Certified Public Accountants Association (CCPA by its Spanish initials).

The results of the study, titled “Portrait of Occupational Fraud in Puerto Rico 2020,” were presented in an online discussion that also included representatives of the Association of Certified Fraud Examiners, the Institute of Internal Auditors and the Puerto Rico Bar Association, which also contributed to the study.

“In percentage points, the study shows the government was the biggest victim,” noted CCPA President David González Montalvo. “What happens is that the government’s contribution to the GNP is smaller.”

The term occupational fraud can be defined as acts committed by employees with the aim of obtaining economic benefits through the misuse or illegal appropriation of organizational resources and the manipulation of financial statements. The 87-page study had the fundamental purpose of collecting information on the incidence of occupational fraud in the government and in private enterprise, the cost related to fraudulent acts and measures that could prevent such unfortunate incidents, González Montalvo said.

The study involved a sample of 44 individuals who had experienced and participated in the investigation of occupational fraud incidents in Puerto Rico in the past two years (from January 2018 to December 2019). In each incident the investigation has concluded and the perpetrator has been identified. In addition, the CCPA interviewed 22 fraud or forensic experts and conducted a third study in which 167 to 192 participants answered various surveys.

“Fraud is a problem that affects both small and midsize, and large companies. The study carried out by the Association provides a portrait or photograph of this criminal activity on the island,” said Eduardo González-Green, chairman of the CCPA’s 2020 Portrait of Fraud Committee. “Occupational fraud schemes can be as simple as appropriation of notebooks, printer ink [cartridges], and other office supplies, to complex schemes to improve operational outcomes, or hide obligations in financial statements and others.”

The study concluded that the cost of fraud is at least 3.5 percent of gross revenue, representing over $2.38 billion for the island economy. The government lost an estimated $459.4 million.

“Based on high cost, companies/entities should evaluate their policies, procedures, internal controls and audit activities,” the CCPA president said. “It is important to continue the educational process for entrepreneurs, because any industry can be a victim. For seven out of 10 study participants, poor internal controls are the main factor that allows occupational fraud to occur.”

González-Green added that “the most appropriate asset is effectiveness.”

“The creation of fraudulent physical documents and the alteration of documents proved to be the main schemes used in occupational fraud; therefore, we recommend strengthening the intervention processes [which includes three-way matching], among other measures,” he said.

The study also found that in 62 percent of the cases fraud was detected through tips, and in 33 percent of the cases through internal audits. An notable finding was that only 65 percent of the companies/entities surveyed have a formal system for receiving complaints. Also, in a change from previous studies, the number of female perpetrators has increased.

As part of the study, the CCPA presented nine recommendations to combat government corruption. Of those, three stand out, the first being “increasing resources for the auditing authorities.”

“With the necessary resources, capabilities and tools, the auditing institutions will have a better chance of implementing preventive and corrective solutions to ensure compliance, and protecting funds and public functions,” the study said.

The second focuses on promoting an open government whose operations are transparently recorded in digital formats.

“This is because, even if there has been an increase in the number of government websites, the information is not being disclosed in a clear, accessible, complete and integrated way, thus making it difficult to access and analyze reliable data,” said Issel Masses, executive director of Sembrando Sentido and member of the Portrait of Fraud Committee.

The third main recommendation is to promote participation, monitoring and social control in public management.

“The government must join the Open Government Alliance and implement its principles, assigning a transparency committee led by an independent entity and in collaboration with civil society, to develop an open government policy, defining the mechanisms and requirements of social participation and inclusion,” Masses said.

The Open Government Alliance is an international organization that since 2011 has been supporting and promoting transparent governments, accountable and collaborating with civil society in the design, development and implementation of public management. It has more than 78 national members and multiple subnational members committed to the development of open, inclusive, comprehensive and efficient governments.

“The first step in preventing fraud is to recognize that there is a risk and that it is necessary to commit to combating it,” González Montalvo said. “To address this, it is necessary to strengthen the recruitment process, attend training, read [extensively] on the subject and use the resources available to prevent it.”

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