The True Cost of Fraud: Direct Costs

It’s no secret that on-the-job fraud is expensive, costing American businesses an estimated $652 billion each year. The typical occupational fraud will cost a company between $10,000 and $500,000. But this represents only the money taken by the thief, not the other costs that can quickly mount.

The cost of fraud can increase rapidly, costing companies in terms of time, money, productivity, reputation and customer relationships. The prospects of recovery of the proceeds of fraud are dim, with 65% of victim companies recovering 25% or less of the stolen funds. And many recover nothing.

A theft touches many areas of the financial statements. Profits are gone and assets and liabilities are likely misstated. Cash flow is impacted as cash during a period of theft was flowing to the dishonest employee when it should have been put into operations.

That cash impact is huge and can hit many areas of the company. Commonly, companies have problems with material purchasing, payroll, and other vendor payments. Payments on loans and lines of credit are often affected when cash is depleted. If the company doesn’t have money for the materials, the payroll, and the financing, the future of the business can quickly be put in jeopardy.

Another area often affected by an internal theft is the company’s tax obligations. It’s common for a fraudster to steal money that has been set aside for payroll taxes, particularly in smaller businesses. Problems from unpaid payroll taxes multiply quickly, as they result in significant penalties and interest.

Some direct financial losses are covered by an insurance policy, but the money not covered by the policy is unlikely to be recovered. So when you think of fraud, don’t think just about the money the dishonest employee steals. Think too of all the other costs that mount because of the theft, and all the opportunities that may be lost if employees are not available or cash is not available to fund operations.

Tomorrow: Indirect costs of fraud.

Tracy L. Coenen, CPA, MBA, CFE performs performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.