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Technology ups risk of employee theft, report says

Source: Toronto Star

Posted on May 26, 2000

      Computer fraud by employees could prove to be the "greatest threat" yet to Canadian companies, which are already losing $20 billion to $40 billion a year to in-house fraud, a new report by consulting firm Ernst & Young says.

      The emergence of a whole generation of computer savvy young employees, and the prevailing attitude that "you're only really successful if you make lots of money," is setting off alarm bells at companies around the world, said Nick Hodson, a partner in Ernst & Young's fraud risk management group.

      "Technology has become a double-edged sword," Hodson said of the 15-country biennial report that highlights computer fraud for the first time.

      "It provides ample opportunity for a person to exercise abuse of power. But it also provides an ability to supply a higher level of documentation and data tracking."

      Eighty per cent of the Canadian respondents said they'd been victims of fraud - everything from employees exaggerating expenses to funnelling money via computer into personal accounts - in the last five years.

      But the real cost of employee fraud is double the $20 billion to $40 billion estimate when you factor in lost productivity, the time and money spent investigating the crime plus the cost of hiring and training replacement staff, said Hodson.

      The respondents surveyed who'd suffered major frauds in the last 12 months reported that they'd recovered just $49 million (U.S.) of the $172 million stolen.

      Computer fraud is "far more scary" than traditional workplace fraud, said Hodson, because older managers "don't know enough about the intricacies of how these things (computers) work and it scares the hell out of them."

      "If you're not computer literate, you can't possibly know what computer fraud looks like. People make mistakes all the time. If you're not familiar with the environment, you won't even recognize that a mistake has been made. It's my belief that mistakes are the test bed for fraud."

      Perhaps most worrisome for companies, said Hodson, is how employees can use the computer to mask their identities or commit fraud using another employees' identity, making it sometimes impossible to track down the real culprit.

      "People are handling volumes of information today that would have been unthinkable even a few years ago," said Hodson.

      "Those same systems that are designed to process transactions effectively and efficiently with the least amount of human intervention will also process irregular transactions effectively and efficiently."

      The computer has made it easier for employees to transfer money to personal accounts and then "move them faster than you can trace them," said Hodson.

      But fraud is still seen by many companies as a cost of doing business: Only one-third of the 739 companies who responded to the survey believes they are doing enough to protect their organization from fraud, said Hodson.

      In one U.S. case, a company took a hard look at how to better protect itself only after an employee had transferred $9 million to a personal account.

      While Hodson wouldn't talk about specific Canadian cases (some of which are still before the courts), he said employees most often use computers to manipulate data, set up fictitious accounts and then funnel money into personal accounts.

      E-commerce has added a whole new element of risk for employers, he said, as well as the fact computers are evolving quicker than "people can assess what the risks of fraud are."

      Eighty-two per cent of the worst frauds were committed by company employees - a third of them managers - most of whom had worked at the company more than five years. "Managers tend to have greater opportunity because they have greater authority to either prevent people prying or to override existing controls. They've been there longer; they've seen more," said Hodson.

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