The Role of Fraud in the Economy

ACCA_Fraud

According to various reports, fraud is South Africa’s number one economic crime and considering that fraud accounts for 7% of company revenue worldwide, any further increases in this figure could prove detrimental to an organisation in these difficult economic times. In South Africa alone, it is estimated that fraud costs the economy in excess of R2 billion a year. There are a number of reasons why people fall victim to the pressures of fraud. In the economic state that we find ourselves in there is scarcity of jobs and this has resulted in people using unethical methods for financial gain. On the other hand, in an attempt to reduce costs, companies usually resort to measures like retrenching staff (which may affect the segregation of duties doctrine), reduced training, abandoning cheques and balances which may be in place, or cutting back on internal audits, amongst various other things. In such conditions, an organisation is susceptible to fraudulent behaviour from its employees both internally, as well as externally in transactions binding the firm. Ever since the 2008 downturn the relationship between the finance industry and consumers has changed. According to an ACCA report titled Culture vs regulation: what is needed to improve ethics in finance, “the crisis shattered the public’s trust in the banking system and as the examination of financial institutions continues the relationship between the bank and the public continues to deteriorate as ever more scandals are announced”. A number of policies have been drafted to aid this situation, but policies and regulations can only go so far. Regulations and policies alone will not be able to combat fraud in business. Regulation failed to prevent the 2008 crisis; risk was constantly discounted. In some instances it was considered non-existent. Technological developments and complex products can be created rapidly, which means that the regulator will always be playing “catch-up”. So maybe in highlighting the impacts of fraud on the economy and how these affect each of us directly there might be some improvements that emerge. Below are some of the impacts of fraud on the country:

  • Corrupt activity hinders development
  • Contributes to the depletion of the public purse and distorts markets
  • Hinders local and foreign direct investment.

Countless studies around the world show how corruption can interrupt investment, restrict trade, reduce economic growth and distort the facts and figures associated with government expenditure. But the most alarming studies are the ones directly linking corruption in certain countries to increasing levels of poverty and income inequality. The issue of ethics comes to play, and these are determined by the culture of an organisation. The ACCA report looks at the culture of tolerance in an organisation, for instance, is profit valued more than the means. Does an organisation promote a culture of high risk overlooking regulations and policies? It is important that business managers realise that these “insignificant” hints lay foundations to bad or good behaviour. Over-reliance on regulators has been found wanting in days of old when dealing with fraud and corruption, it is therefore important that business managers understand that the most power lies in the culture of the organisation and they have the most influence on this than external regulators.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s