The truth about internal fraud

April 8, 2019

By Heather Vetter, 
Partner

“Small frauds aren’t that important.” “My employees would never steal.” “If we had fraudsters, they would stand out like a sore thumb.”

These are common answers from business owners about the question of potential fraud in their workplaces. In reality, that’s just not the truth. In fact, small- to medium-sized businesses are the most prone to workplace fraud, and over half of victim companies don’t even realize it’s happening.

Some quick facts:

• Asset misappropriation plays a role in 89 percent of fraud schemes.
• Certified fraud examiners estimate that 5 percent of annual revenues are lost to fraud. That’s $4 trillion when applied to gross world product.
• Median loss to fraud for small business is two times as high as their larger counterparts. That’s a $200,000 loss to a small-business owner vs. a $100,000 loss to a large-business owner. This often is because of less availability to resources and/or stronger sense of trust in personnel.
• 53 percent of victim companies don’t recover their fraud-related losses.
• Fraud schemes typically last 16 months before being remedied. Active monitoring of financials can decrease the length of a scheme by 75 percent.
• 89 percent of fraud perpetrators identified in an Association of Certified Fraud Examiners 2018 study had not previously been charged or convicted of fraud-related offence.
• 97 percent of fraudsters implement some tactic to conceal their acts like creating, altering, and/or deleting documents and transactions. The more people involved in the controls of your organization, the less opportunity they will have.

Some key points to watch for include people living beyond their means, strong employee relationships with vendors or customers that seem out of place, and control issues or unwillingness to share duties.

All it takes is a need and an opportunity. Consider the fraud triangle: Incentive, rationalization and opportunity. People don’t enter businesses as fraudsters, but with the right motive, opportunity and need, they can do unexplainable things.

From writing checks to themselves, to working out deals with vendors under the table, to controlling all the accounts and processes, the possibilities are endless for how an employee can deceive a company.

So, what can you do? First and foremost, have a separation of duties. You must have multiple people in the accounting system who know how to use it and who have different roles. Have someone independent of the cash process receive and review the bank statement.

The ultimate person in charge of accounting would ideally have a mandatory one or two weeks off a year at which point someone else performs those duties to ensure accuracy.

Getting someone else involved, such as a senior manager, to reconcile accounts monthly can catch fraud earlier, and always make sure to look over credit card activity.

Additionally, establishing a code of conduct that all employees and vendors sign and fostering an atmosphere of honesty and integrity are key: Tone at the top is important.

Nonprofits are especially vulnerable to fraud because of limited resources and often no checks and balances.

Ultimately, don’t let your culture blind you. Trust and loyalty are great, but they can create an opportunity for fraud.

This article was previously published in the Tri-State BizTimes.