Managing Conflict of Interest - Organisation for Economic Co ...

166 Managing Conflict of InterestThis survey also provides a demographic profile of those committingfraud, indicating that losses caused by men are nearly four timesthose caused by women; losses caused by managers are four timesthose caused by employees; and losses caused by executives andowners are 16 times those of their employees. These statistics may becorrelated on the basis of the ratio of men to women in managerialpositions. While the occurrence of employee fraud is most frequent,the cost of fraudulent financial reporting is much higher. Small businessesare the most vulnerable to fraud and abuse. Financial statementfraud causes a decrease in market value of stock of approximately 500to 1,000 times the amount of the fraud. Essentially USD7 million infraud can be equated to a $2 billion drop in stock value.The findings of this survey and other empirical evidence make itabundantly clear that it is imperative for organizations to establishrobust fraud prevention mechanisms and processes to safeguardtheir assets and shareholder interests.Preventing Fraud: The Case for Establishing Effective “Whistleblower”SystemsWho Detects FraudAs shown in Figure 2 below, the most common method of detectingfraud is an employee, customer, vendor, or anonymous sourceinforming authorities. Among the cases that were detected by suchwhistle-blowing, 60% came from employees, 20% from customers,16% from vendors, and 13% from anonymous sources. Organizationswith fraud hotlines and anonymous reporting cut their fraudlosses in half. Among the cases of fraud committed by owners andexecutives, which tend to be most costly, over half were identifiedby a tip-off. Internal controls, internal and external audits, notificationsby employees, and background checks are some leading waysto uncover fraud. Thus, it is imperative that organizations establisheffective processes to encourage employees and third parties toreport irregularities. Key measures include establishing fraud hotlinesand policies to protect whistle-blowers.Fraud Triangle: What Conditions Lead to FraudThe conditions that lead to fraud can be illustrated by threepoints of a triangle: perceived opportunity and suitable targets atADB/OECD Anti-Corruption Initiative for Asia and the Pacific