If you think your organization is immune to fraud, you could be wrong. If you are wrong, it may cost you hundreds of thousands of dollars, or even shutter your business. In the Association of Certified Fraud Examiners’ 2008 “Report to the Nation,” survey participants estimated fraud cost the nation approximately seven percent of annual organizational revenues. This totals $994 billion annually in fraud losses in the United States alone. Can your organization stand to lose seven percent of your revenues?
Sadly, once employees begin to defraud their employers, these acts generally continue undetected for years. In about two-thirds of the schemes the survey reviewed, the perpetrators acted alone. However, when two or more employees acted in concert, the losses from the event were more than four times greater than from those who acted alone. Greater than 50 percent of the swindles were perpetrated by either the accounting department or upper management.
What contributes to fraud? The survey of 959 cases of fraud investigated between January 2006 and February 2008, found the greatest fraud contributor was a lack of internal controls, followed by a lack of management oversight and an override of existing controls. An override is more likely to occur when individuals collude to steal.
Fraud costs money, sadly, and plenty of it. The median loss in the acts surveyed was $175,000, and at least one-fourth of the losses surveyed cost in excess of $1 million. 24 percent involved fraudulent billings, but 27 percent involved corruption.
What steps can your organization take to reduce fraud? Here are some tips the paper offers:
- Institute a hotline for reporting fraud. Forty-six percent of the cases in this study came to light via tips from employees, vendors and customers.
- Don’t rely on background checks to eliminate fraudsters. In this study, only seven percent of the perpetrators had previous fraud convictions.
- Watch for behavioral traits. The two most common are employees experiencing financial difficulties and those living beyond their means. Of those cases in this study, 39 percent of the employees were living a lifestyle in excess of their salaries.
- Watch for “unusually close associations with vendors.” According to the study, this is one key fraud indicator. The median loss for these types of thefts was $410,000.
- A “wheeler-dealer” mentality was noted in 20 percent of the cases. Although the study did not define the term, employees who steal are frequently control freaks who refuse to allow anyone to oversee their work. Watch for that “I have it under control” attitude.
- If you suspect substance abuse, you may want to step up internal controls and refer your employees to employee assistance, if your organization offers this benefit.
- Don’t assume your organization is too well managed or you treat your employees too well for them to steal from you. Bulletproof your business by purchasing insurance coverage to protect you against these types of occurrences.
If you would like to read the entire 60-plus page paper, check out the ACFE 2008 Report to the Nation.