Of all the threats to businesses in this turbulent economy, one of the most dangerous and increasingly overlooked usually comes from within. That’s occupational fraud.
The Association of Certified Fraud Examiners estimates that U.S. businesses lose up to 7 percent of their annual revenue to fraud, often in the form of misappropriation of assets and corrupt activity, such as kickbacks. Applied to the 2008 U.S. Gross Domestic Product, that translates into approximately $994 billion that was siphoned away from businesses last year alone, by the very people who are supposed to be helping bottom lines, not hurting them.
An equal opportunity risk. It’s not just certain sectors or businesses that are prone to fraud. It’s a risk all industries face, at all levels. Fraud is committed not by sinister characters lurking in shadows, but, in most cases, accounting department personnel and upper management — those who have ready access to accounting records and funds and these days, are often experiencing financial difficulties or living beyond their means.
Recently, just here in Connecticut, we’ve seen a bookkeeper who embezzled more than $15 million from her employer, a grandmother who embezzled $200,000 to help her drug-addicted grandson, and a woman who defrauded her former employer of more than $1.7 million. While these are obviously just a few of the higher profile cases, there are many, many more, reported an unreported, that add up to staggering amounts of money lost to state businesses.
Easy to hide, hard to detect. You may be thinking, that I’d know if fraud was happening at my company. Actually, chances are good that it is happening and you don’t know about it. Fraud is often carefully hidden under the radar by employees intimately familiar with your business’ inner processes, and may not be detected for years — if at all.
Protection always begins with prevention. So, what can you do to keep fraud from draining your business’ lifeblood? There are several steps you can take to protect your business, including:
1. Establish an anonymous fraud hotline. Investing in an offsite call-in line where everyone from employees to customers and vendors can anonymously report suspected fraudulent activity is one of the most important techniques for preventing fraud. Studies show that more fraud is discovered through tips than any other way.
2. Implement written fraud procedures and policies. It’s critical that everyone in your business knows what to do when fraud is suspected or discovered. This includes when to notify authorities and how to communicate both within and outside the business.
3. Provide anti-fraud training. Have you communicated your business’ ethics policies? Are your employees aware of what constitutes fraud? Do they know how to spot fraud — what steps to take if they do? Make sure you take the time to provide both new and existing employees with the education they need to help you fight fraud.
4. Safeguard electronic assets. In the electronic age, your businesses electronic records are vulnerable to attack from both inside and outside your organization. Make sure your IT department has your technology “locked down” with features like network security controls, remote access controls and application security controls.
5. Conduct thorough background checks. Many companies ask for references…and most never really go beyond a quick phone call to one or two of them (if they even do that). Make sure you thoroughly pre-screen not just new hires, but new vendors, suppliers and business partners. It takes time, but it will pay off the first time you spot a red flag.
6. Make someone within your organization responsible for fraud detection. By now, you’re probably wondering who’s going to take responsibility for all these prevention efforts. Good question. And one that most companies never ask — or answer. If you don’t appoint a “Fraud Czar” at your business, chances are most of the techniques mentioned above will fall through the cracks. So create the position and make sure it’s someone’s job to stay on top of fraud.
Be proactive, not just reactive. As some athletic coaches are fond of saying, the best defense is a good offense, which is why many companies choose to bring in an outside firm to conduct a thorough assessment.
Fraud Risk Assessments involve a comprehensive analysis of an organization’s fraud risk tolerance, identifying any areas that are most vulnerable to fraud and examining existing fraud risk policies and procedures to determine if they are adequate.
The result is typically a detailed report pinpointing opportunities to reduce the risks and costs of fraud, as well as actionable steps for creating new and more effective fraud prevention policies and procedures.
Financial security starts from within. These days, with so many outside, uncontrollable hazards impacting the finances of companies, occupational fraud is one important, ever-present risk which you can — and must — prevent. It’s actually relatively simple and inexpensive to implement, taken one step at a time. In this economy, why leave your business open to any additional threats?
Richard P. Finkel, CPA, CFE, CIRA, CFF, is a partner at BlumShapiro.
Reader response:
“Most small businesses do not have the resources to implement the recommendations in this article. Perhaps you would consider doing an article listing procedures that are both practical and effective for the average small business owner. Thank you.” — Ruth Crane, Auditors Inc.
“Many of the ideas can actually be implemented at low cost. Rather than a toll free live answered number – simply suggest people mail a letter to the CEO’s home and publicize the address (or a PO box). Part of it is simply letting people know you encourage reporting. Deep dive into various business areas like looking at all cancelled checks and digging into invoices sporatically is also a good method.” — Jim Estill, CEO Blog
“It is understandable that “small businesses” are have limited resources to deter fraud, but it is difficult to present a list of procedures for the “average small business owner” since each business has their own peculiarities and requirements. When it comes to fraud, prevention & deterrence are more important than identifying an ongoing fraud.” — Brent D. Berkman, CPA
“Absolutely, Occupational Fraud should be looked at, and you may want to look at some of the “Red Flags”, like what cars are in the parking lot that your employees are driving, or houses they’re living in. Expecially on such a low salary. The multi-million dollar homes or high-end luxury vehicles could be red flags of possible wrong doing. “Remember these are only a few of the possible indicators”, It isn’t a 100%, just a possible red flag to look at…” — Bill Perry, Bill Perry & Associates, Inc. Security & Investigations
