Insights | Blog
An Ounce of Prevention in Preventing Fraud
As the economy shows signs of improvement, we hope that businesses continue to realize growth in revenue and profits. With increased cash flow, business managers and owners must still take care to avoid being victims of fraud – whether internal or external.
Bi-annually, the Association of Certified Fraud Examiners releases its Report to the Nations regarding business fraud. The last report (2012), in line with prior years’ reports, noted that survey participants typically lost the equivalent of 5% of revenues to fraud each year. For many businesses, an additional loss of 5% of revenues to the bottom line means the difference between a struggling, marginally profitable venture and one that is losing money. How would your banker feel if your bottom line showed a loss of 2% versus profit of 3%?
Threats to businesses abound in today’s wired world. While external, computer-hacker type frauds make large splashes in the media, a business is more likely to be defrauded by a trusted employee who works at the business.
Most business fraud is committed from within. In fact, the 2012 Report noted that 96.7% of frauds reported were committed by an owner or employee of a business. In most cases, there was a single perpetrator of the fraud. A single perpetrator is, for a business, actually a fortunate occurrence: should there be more than one perpetrator colluding on the fraud, the median loss increases by 250%!
Businesses are defrauded in a number of ways, but the most typical methods observed were asset misappropriations including theft of receipts and fraudulent disbursement schemes. The disbursement schemes most often utilized were payments to a fictitious vendor, fraudulent expense reporting by employees, check tampering, and payroll frauds.
One of the best steps a business can take to prevent fraud is to set up a whistle-blower tip line. Tips were used to detect over 43% of frauds studied in the report – by far the most successful method. Owners and managers also must set the precedent that fraud will not be tolerated and develop strong internal controls to prevent incompatible duties. By using these tools, a business will not prevent all frauds. It will, however, reduce the likelihood of fraud occurring, the duration of a fraud should one occur, and the magnitude of the loss caused by fraud.
Fraud prevention should be of critical importance to all businesses and non-profit organizations. Occurrences of fraud lead to bad publicity and generate concern amongst creditors, donors, and other financial stakeholders of a business. Frequently, the effects of a fraud cannot be overcome and lead to the death of a business. This causes additional losses to all employees and stakeholders.
Is fraud prevention something you’ve considered? It’s never too late (or too soon) to take proactive steps to prevent fraud victimization to your business or organization.