Is your company at risk? Steps to prevent business fraud
Employee dishonesty is more prevalent than we’d like to admit. Let’s face it: No one wants to think that one of their hand-picked employees may be stealing from them or cheating them. Yet it happens more often than we’d think.
“Occupational fraud is very likely the most costly and most common form of financial crime in the world.” Fraud is now so common that its occurrence is no longer remarkable, only its scale,” says the Association of Certified Fraud Examiners (ACFE) in its Occupational Fraud: Report to the Nations. “Any organization that fails to protect itself appropriately faces increased vulnerability to fraud.”
Types of insider fraud
The risk of insider fraud, better known as occupational fraud, permeates every industry – even education, religion and charities. Occupational fraud is typically divided into three buckets: asset misappropriation (that’s the stapler you took home a few years ago and never returned), bribery/ corruption and financial statement fraud.
Besides inventory theft, asset misappropriation also includes theft of money, check forgery, payroll fraud or theft of services. It’s the most common type of fraud (happens in 91 percent of fraud schemes, says AllBusiness, but it’s also the least expensive type of fraud.
Bribery and corruption, the next bucket of fraud, occurs in about 30 percent of fraud cases. It can include manipulating contracts, substituting inferior goods, bribes to influence a decision, kickbacks and shell company schemes.
Financial statement fraud results in three times the loss as the other two combined, although it’s the least common, occurring in only 10 percent of cases. It includes manipulating financial statements to create financial wins for an individual or group, such as playing with stock prices, loan terms, or year-end bonuses.
Related: How you can stop employee fraud
What does a typical fraud event cost?
The typical organization loses five percent of its annual revenues to fraud, says ACFE in its Occupation Fraud: A Report to the Nations. The median loss from one case of occupational fraud before being detected is $117,000 but nearly a quarter of these occupational or insider fraud cases resulted in a loss upwards of $1 million.
At the high end of the spectrum are median losses in real estate at $435,000, wholesale trade at $400,000 and transportation and warehousing at $250,000. We hear a lot about employee theft at retail organizations, yet their median loss is $65,000. At the low end of the spectrum, as reported by ACFE, is education, at $56,000 per event.
Their studies also show that the more conspirers there are involved in a fraud, the higher the losses are: the median loss when one person defrauds their company is $57,000. Two people, $145,000. Three or more people, $219,000.
Why are small businesses more vulnerable?
If you own or manage a “small business” (i.e., less than 100 employees), know this: nearly one-third of fraud cases occur in small businesses. Even scarier, 60 percent of these companies didn’t recover any of their losses – and their median loss is $150,000.
Top fraud risks for small businesses are: Corruption, 24 percent. Non-cash misappropriation, 19 percent. Billing schemes, 13 percent. Check tampering, 10 percent. Skimming, 9 percent.
When they spot fraud, these organizations of 100 employees or less typically detect it in one of these ways:
- A tip – 42 percent
- Management review – 12 percent
- Internal audit – 16 percent
- Document examination – 6 percent
- Just by accident – 5 percent
Here’s the kicker: We all think it won’t happen to us. Our employees like us; no one would cheat us. We like to think we keep a close eye on the books and take basic steps to prevent fraud. And our head-in-the-sand attitude costs: companies without anti-fraud controls suffered twice the losses of those that had controls in place. Those controls are typically management review, proactive data monitoring and analysis, and an employee hotline.
Steps to prevent business fraud
ACFE lists six steps every organization should consider to reduce your vulnerability to fraud:
1. Establish a code of ethics for management and employees, and have each employee sign the document.
2. Evaluate your internal controls for effectiveness and identify areas that may be vulnerable.
3. Institute more checks and balances, such as
- Requiring management review and certification of financial statements
- Requiring a consistent external audit of both financial statements and of your internal controls over financial reporting
- Conducting random surprise audits
- Adding an audit department and/or an independent audit committee
- Establishing anti-fraud training
- Instituting mandatory vacations or job rotation
4. Hone your hiring procedures. Conduct thorough background checks that include educational, credit and employment history, plus references.
5. Create a tip line. ACFE says fraud is most likely to be detected by a tip, so provide an anonymous reporting system for employees, contractors and clients.
6. Communicate your stance on fraud – consistently. Remind staff of your anti-fraud policies and potential consequences, and that your tip line is anonymous and easy-to-use. Consider anti-fraud training for executives, managers and employees.
Need more information on steps to prevent business fraud? ACFE has a free, downloadable fraud prevention check-up form so that you can determine how vulnerable your company may be. It also provides some prevention methods and policies to help you get started.
This article originally appeared on Arrowhead’s corporate blog. It has been updated and modified to better fit the needs of our Tribal agents and their insureds.