FINRA's BrokerCheck

With Fraud on the Rise is Your Business a Target?

Investigative experience reveals challenging economic conditions pave the way for a rise in fraud — and the current economic climate is no exception to the rule. With everyone — particularly small businesses — cutting back to shave costs, the possibility of fraud is even more likely. Yet, no matter how prevalent the problem, we often deceive ourselves into believing that this is a problem reserved for large corporations.
The truth is when you're looking to minimize business costs, the last area small business should reduce is financial oversight. It is often tempting to look towards non-revenue producing business functions as an easy area to cull personnel, but such cuts often come back to cost more in the long run. Fraud at private companies represents the greatest median loss — nearly twice as great as fraud losses in public companies. Asset misappropriation (cash, inventory and other assets) tops the list with 85 percent, followed by bribery and corruption (10 percent) and fraudulent statements (5 percent) (these figures are not concrete as many frauds involve more than one scheme). And the monetary losses can be staggering.

So what can your company do? The best starting point is to implement proactive themes in your workplace. The first of these is to create a culture of high ethical standards. CEOs and other executives who set an example for staff and expect them to follow this example are vital. This ethical culture begins before an employee is even hired by utilizing background checks to screen job applicants and carries through to a "zero-tolerance" policy when dealing with offenders.
Next, businesses must implement an oversight plan. By managing your organization's fraud risk you can provide great protection. A well thought out oversight plan should include:

  • A risk management plan that includes a written policy
  • Periodic assessment of your fraud risk exposure
  • Established prevention techniques that are adhered to
  • Established detection techniques to uncover fraud events
  • A reporting process that is designed to encourage input on potential fraud

Having established procedures in place and, more importantly, implementing them is crucial. Be sure to exercise great care to ensure legitimate, well-established internal controls are followed without exception. Internal controls are the structure management must establish to ensure that they meet their responsibilities. This begins with setting up an internal control framework. A good framework should consist of the following:

  • The control environment
  • Risk assessment and monitoring (including control-related policies and procedures authorization, properly designed records and security of assets and records)
  • Segregation of incompatible duties
  • Information and communication
  • Monitoring

Even with great safeguards in place, fraud can still occur. Once it's detected, the perpetrator needs to be identified. Detecting fraud isn't always easy and discovering the perpetrator is often just as difficult. After all, it isn't as if they're wearing a sign. However, there are warning signals to look for and areas to which you should pay close attention. The first place is your records. Disorganization in the bookkeeping, unrecorded transactions, missing records, excessive voids or credits and un-reconciled bank accounts are some of the prime indications that things are amiss.

Before a problem is even detected, there are indicators that should lead to suspicion. While some are more obvious — living beyond ones means, problems with drugs or alcohol — others are a bit more subtle — special circumstances that may require more money (divorce/death in family/medical care) or close relationships with vendors. Once again, diligence is essential. It's important to be able to trust your employees, but this is a case where, "trust but verify," is very important. There is no substitute for being aware and keeping track.

As cynical as it may seem, you have to expect fraud. Recognizing the possibility — or more accurately the probability — of fraud will go a long way in preventing it. Once you admit the possibility, you increase the odds of preventing your business from becoming a statistic.

By the Numbers: The High Cost of Fraud
If it seems like fraud is affecting everyone, it may just be because it is. From local small businesses to multi-national corporations, no one is immune. And not only are the number of occurrences high, the actual cost to the businesses is too. Considering that the typical organization loses seven percent of its annual revenue to occupational fraud, the numbers are not to be taken lightly.

The numbers below tell a startling story and offer a real wake-up call for any business owner. The bad news is seemingly every type of business is susceptible, so it's important for companies to be aware of this very imminent threat. The good news? Recognizing the possibility of fraud is the first step in prevention. After all, forewarned is forearmed.

  • 2= Number of years the typical fraud goes on, from the time it starts until it is caught
  • 55= Percentage of fraud committed by owners, executives or managers 
  • $154,000= Median loss incurred by small businesses in a typical fraud case
  • 50= Percentage of cases that reported losses in excess of $200,000
  • $1,000,000= Amount lost in 20 percent of all fraud cases
  • 58= Percentage of victim organizations that do not recover any money 
  • 42= Percentage of frauds detected by tip – (highest percentage)
  • 16= Percentage of frauds detected by management review (second highest percentage)

*Statistics drawn from the 2014 Association of Certified Fraud Examiners study.

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