The True Cost of Fraud: Indirect Costs

As a company deals with the direct financial damage done to it by an employee theft, it has other costs and losses associated with the fraud that are often overlooked.

Companies rely on upper management to provide leadership, sales and marketing, and business management expertise. These skills are often even more critical after a major theft, as the company is usually left wondering how bills will be paid. Yet during this time, management is often focused on helping put together pieces of the theft puzzle. They inadvertently are distracted from the regular operations, and that can cost them dearly.

Employees left behind after the fraudster leaves are often called upon to help dissect the fraud and reconstruct records. They are often trying to repair the damage done to the financial statements and accounting records. While employees are working on this, what is happening to their regular duties?

What about the costs to investigate the theft? Consultants, fraud investigators, computer security professionals, and attorneys cost money. And those costs can mount very quickly.

Then you have indirect costs that are caused by the unreliable financial data. After a theft, it's more important than ever that a company has a source of funding, whether it be a bank or an investor. But if reliable financial statements aren't available, how is the company going to get the financing it needs?

Maybe there's already a financial relationship in place with a bank or an investor group. Will that relationship be on solid footing after a major fraud? Maybe not. Particularly when a company has a situation in which their tax obligations or vendor debts are mounting, a bank or investor may not be willing to provide funding to help alleviate the pressure from these situations.

Additional money may likely be spent on consultants and auditors to help secure the company's assets and prevent future frauds. Fixed asset purchases may be necessary to help shore up computer security and the physical security. New risks may be identified during the investigation, and there will be a cost involved in protecting the company from these future threats.

It's easy to see how the costs of an internal fraud multiply quickly. See why fraud prevention is so important for the long-term viability of a company?

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.