Fraud and Your Business

Think your business is beyond the reach of fraud?  Think again.  The Association of Certified Fraud Examiners “Report to The Nations on Occupational Fraud and Abuse 2016 Global Fraud Study” explains why and how your business is vulnerable.  The report cites 2,410 cases of fraud in 114 countries that were studied between January 2014 and October 2015.

The study found that the size of an organization has a direct correlation to the types of fraud that it is susceptible to.  Asset misappropriation includes theft of cash on hand, theft of cash receipts, theft of inventory, billing schemes, payroll schemes, check tampering and skimming.  These types of schemes were more commonly found in small organizations, and of these, billing schemes and check tampering posed the highest risk.

Financial statement fraud was the least common fraud but resulted in the highest median loss.  Financial statement fraud includes both the overstatement and understatement of company net worth and was found to be present more often in larger organizations.

Corruption fell in between asset misappropriation and financial statement fraud.  This type of fraud includes conflicts of interest, bribery and illegal gratuities. 

Some of the things that the study revealed include:

  • The typical organization loses 5% of its revenue to fraud each year.
  • The average median loss incurred by organizations with less than 100 employees was the same as the average median loss incurred by organizations with more than 10,000 employees.
  • The presence of anti-fraud controls has a direct correlation to the rate of detection and the amount of the loss.
  • The perpetrator’s level of authority was strongly tied to the size of the fraud.
  • The conspiracy of two or more people resulted in higher median losses.
  • Most occupational fraud originates in the accounting department.
  • The most common organizational weaknesses are related to lack of or poor internal controls.
  • Fraud perpetrators usually display changes in behavior as they are committing fraud, including living beyond their means, having financial difficulty and having close ties to vendors, customers or employees.

So, what does this mean for your business?  How can you reduce the risk that is inherent in your company?  First, identify what types of fraud are more prevalent according to the size of your organization.  Second, create a code of conduct for your business including employment and ethical standards.  Third, create a separation of duties wherever possible between those with access to records and those with access to assets.  Fourth, screen all employees and verify all the information that they provide.  And last, set up a reporting mechanism where employees, customers, vendors and others can report suspicious activity without fear of retaliation. It’s a fact that most fraud is detected by use of an anonymous tip line or hotline.