Fraud can have a serious impact on a business; and, unfortunately, many companies are ripe for the taking. Owners and management need to be acutely aware of the warning signs and prevention methods that will help reduce the risk and impact of fraud.
According to the Association of Certified Fraud Examiners (ACFE), fraud costs any given entity an estimated 5% of its revenues each year. Private companies are reported to have a median loss of $200,000/year, with even greater losses reported when broken out by industry per year: $375,000 in real estate; $300,000 in construction; $250,000 in oil and gas; and $200,000 in manufacturing.
What makes a company an easy target? The ACFE sites weak internal controls as the culprit for 74% of fraud instances. Typical “fraudsters” are males ages 35 to 45. Expense reporting is an area of “opportunity,” including double reporting and the usage of fake receipts. (There are even websites that allow individuals to create and order their own professional-looking fake receipts.) Paying invoices to fake vendors is another way employees can skirt the system. Additional areas ripe for fraud include payroll, vendor and customer kickbacks; employee incentives (e.g., pay incentives for sales, profits, gross margin, attendance record, no injuries, etc.); bribes; stolen inventory or fixed assets; and the abuse of company credit cards.
Detect It
The ACFE reports that management review and internal audits each account for approximately 15% of detected cases. Management and owners need to take a more active role in identifying fraud early on. Look for some of these key red flags:
Also beware of the “perfect employee.” While every business owner wants to trust his or her employees, be mindful of an employee, particularly one with access to the company’s financial information, who often comes in early/stays late, takes on additional responsibility, rarely complains, earns management’s trust, is unusually attentive to customer complaints, and has personal financial troubles that are suddenly resolved.
The ACFE reports that tips make up 43.3% of detected fraud cases. Since most tips come from employees, vendors, customers and other sources close to the business, an easy way to help encourage suspicious activity reporting is to offer an anonymous, third-party reporting hotline.
Prevent It
Prevention is, of course, the best case scenario when it comes to fraud. Management and owners can help stop fraud before it starts by remaining aware, present and diligent:
Take a Hard Look
One of the hardest, yet most important, things to do in the prevention and detection of fraud is for business owners and management to look at themselves and how they run the business. Do we have the right policies in place? Are they clearly communicated to employees? What else can we be doing? Ask these 10 questions to begin reducing the risk of fraud:
For more information, contact Keith Klodnick at kklodnick@cohencpa.com.
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