What Can A CIO Do To Prevent Fraud?

by drjim on May 19, 2010

The IT Department Is Uniquely Positioned To Uncover Fraud

The IT Department Is Uniquely Positioned To Uncover Fraud

When you become CIO, it turns out that you’re going to have a lot more on your mind than just how to use the latest and greatest technology to help the company run faster. You’ve got a problem that starts with “F” and rhymes with “Baud” and that stands for Fraud

Bad Times Make Fraud More Likely

When things get tough at a company, people start to feel the pressure to deliver results no matter what. Some recent studies by behavioral psychologists have revealed a trait that all of us have called “reframing” . This occurs when in order to get away with cheating, we adjust the definition of cheating so that it excludes our actions. Neat trick, eh?

What this means for you soon-to-be-CIOs is that just about anyone working for the company is capable of committing fraud. Hard times brought on by, oh say, a global recession, can boost the chances that someone will cross that line that should never be crossed.

The Fraud Triangle

Look, you’re going to become the company’s CIO and unfortunately that’s not going to suddenly equip you with magical mind-reading abilities. Instead you are going to have to be aware of what is called the “fraud triangle” and keep you eyes open both within and without the IT department.

The fraud triangle has (of course) 3 sides to it: pressure, opportunity, and that ability to rationalize your actions that we’ve already talked about. Any one of these by itself probably isn’t enough to push one of your staff to do something that the entire company might regret, but put all three of them together and you’ve got the makings of a serious problem.

3 Categories Of Fraud

So how big is this fraud thing? Well first you need to understand that study after study have shown that people will cheat if they think that they can get away with it. What makes this even more amazing is that they will cheat no matter what their background is (Ivy Leaguers do it too) and they’ll cheat even if they really don’t have all that much to gain by cheating.

This is a big deal for companies. A 2007-2008 survey that was done by the Association of Certified Fraud Examiners (ACFE) revealed that companies may be losing up to 7% of their annual revenues due to employee fraud. Now that’s a big number!

There’s lots of ways that IT staff along with the rest of the business can commit fraud. However, if we had to group them together, they’d all fall into one of three different buckets. These groupings are: asset misappropriation, corruption, and financial statement fraud. It turns out that asset misappropriation is the most common and averages roughly $150,000 per event. On the other end of the spectrum, financial statement fraud is the least common but the most expensive – it costs the company $2M on average every time it occurs.

How To Stop Fraud

So how does the CIO fit into all of this you may be asking yourself? The answer is actually very simple: good leadership. The goal of every CIO should be to prevent IT staff from making bad judgement calls before they become fraud. A CIO who establishes clear standards for the IT department to follow has gone a long way in preventing fraud from occurring in the first place.

Of course, we’re talking about the IT department here and so there has to be a second level of effort – fraud detection. The CIO has access to the entire company’s data and it’s electronic tools. He / she is best suited to working with the CEO and CFO to implement the IT sensors that will alert them if something unusual starts to happen.

What All Of This Means For You

Fraud is, unfortunately, all too common in modern companies. A CIO has a key role to play in both preventing fraud from occurring within the IT department and detecting it when it happens in other parts of the business.

Understanding that anyone can end up committing fraud given the right set of circumstances is the key to preventing it. CIOs need to establish clear standards that make sure that everyone knows what is and is not acceptable behavior within the company.

In the end, it’s the tone set by the CIO that will be communicated down to the rest of the IT staff. Preventing fraud is something that a CIO can do by leading by example.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Department Leadership Skills

Question For You: What do you think the is #1 thing that a CIO can do to prevent fraud from happening in the IT department?

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What We’ll Be Talking About Next Time

You want to become a CIO. You probably want to become a CIO in the private sector – you know, those companies that have owners or stockholders that they always have to work to keep happy. Why haven’t you spent any time thinking about becoming a CIO who works for the biggest employer out there: the U.S. Federal government?

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{ 2 comments… read them below or add one }

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