FRAUD PREVENTION
Is Detection Too Late?
By Donald J. Snyder, CPA
Fraud may just be the biggest problem facing the company you work for or own that you aren’t even aware of. How many fraud related situations are you trying to sort out even now? None? Well, face up to it, fraud is occurring at your company right now whether you are aware of it or not.
Consider these scenarios:
A. A loyal and trusted bookkeeper with over twenty years experience with a company and who is considered to be “part of the family” has been understating cash receipts for the last five years and has deposited to her personal account well over $200,000 because “the company owed it to her”.
B. A salesman on a business trip in Las Vegas takes a $10 taxi ride from the airport and is given a blank receipt to fill out with which he claims $17 on his next expense report.
C. The daughter of a successful business owner is now running a company division, and on the surface, is doing a good job of it. The division has been purchasing milling machines for years at $50,000 each. But now, the daughter has negotiated with a new vendor to purchase the same mill for $40,000. Excellent negotiating. However, the vendor is invoicing the company $45,000 and the daughter and vendor’s salesperson are splitting the $5,000 kickback. Not only has the daughter stolen $5,000 from the company, but, she honestly feels she deserves the “commission” for successfully negotiating the price reduction.
Each of these are examples of fraud, only one of which will likely result in any type of response from management. In fact, management, in some instances, may not even pursue a conviction of the bookkeeper in Example A because it may lead to public embarrassment to the company for allowing this fraud to happen. Also, the family of the daughter running the division may allow her to continue these practices rather than face the painful and humiliating truth.
If any of these examples and/or other acts of fraud were committed and detected, the most important question facing management is not how much money was taken but rather what procedures could have originally been put into place to prevent these acts from occurring.
Fraud is a major global problem. According to law enforcement agencies, it is the world’s fastest growing crime with substantial monetary amounts lost each year. Fraud affects the whole range of economic activity within global markets, national governments, the business community, charitable and individual organizations. It is becoming more sophisticated, aided by state-of-the-art technology and advanced communications systems.
While the current global cost of fraud is unknown, it could be reasonably estimated at many tens of billions of dollars, based upon examples of documented losses. However, it has been estimated that losses to fraud in the United States in 1997 were in excess of $400 billion. In fact, according to “The Report to the Nation on Occupational Fraud and Abuse,” a survey based on 2,608 cases, the average company loses approximately 6% of its total annual revenue to fraud and abuse committed by its own employees.
Indeed, fraud has become so widespread that there is a growing anxiety that it is beyond the capacity of the police alone to control. Typically, the police are interested in those cases in which they become aware. They are completely powerless and have no real role in preventing fraud. Further, they may have neither the time nor the manpower to truly handle cases which are brought to their attention. Firstly, fraud is often thought of as a victimless crime; insurance, or nameless corporations foot the bill. Secondly, law enforcement is reluctant to pursue fraud cases in which the victim may or may not decide to press charges. Media attention to violent crime and the higher goal of protecting the public safety, not their economic welfare, focuses their attention elsewhere. This more than any other factor, points out that the higher goal of management is to recognize that their own key role is prevention. More than 50% of fraud could have been prevented through awareness of the solutions and by the implementation of effective preventative measures.
Typically, there exists a false sense of security concerning the escalating threat of the existence of fraud in a company. The typical outlook is characterized by:
? ignorance of the potential problems
? a belief that fool-proof fraud system checks are in place
? confidence that adequately trained staff exist to carry out such checks
? a conviction that reliable procedures exist for the prevention and detection of fraud, and
? an incorrect assumption that people are generally honest
How can companies fight the threat of fraud? The best defense against fraud is to be aware that it can happen to you, and to communicate to employees that you are aware of the threat of fraud and not only won’t tolerate it, but are actively taking steps to prevent it. There are three main areas where the risk of fraud is the greatest. By focusing on these areas, a company can minimize the risk of being a victim.
Management Controls
? Management must make an overall written company policy on fraud and crime. This policy should state that management is responsible for knowing exposures to wrongdoing and for establishing controls and procedures for detecting suspected wrongdoing. This policy should be disseminated to all managers, supervisors and other employees.
? The company should make written procedures for all areas that could be at-risk and disseminate this information to the applicable managers, supervisors, and other employees.
? There should be a clear statement forbidding illegal activity, including fraud for the benefit of the organization, and that suspected wrongdoing will be fully investigated.
? A statement should be made requiring any employee who suspects wrongdoing to immediately notify their superior or those responsible for investigations.
? A statement should be made that suspects will be treated consistently without regard to past performance, position held, or length of service.
? Make sure all employees understand the fraud policy and procedures and that they sign to acknowledge that they do.
? The fraud policy should be reviewed annually with each employee.
? Changes in the policy must be communicated to all staff as soon as possible.
? All consultants, contractors, and temporary staff must comply with the company fraud policy before commencing work.
? The company should check bank and credit references of new suppliers and customers through outside credit agencies.
? Ask new or risky customers for partial payment in advance, or initially limit the amount of sales to these customers. Consider requesting personal guarantees.
? Consider computer security and make sure that everyone knows the policy concerning Information Technology.
Employee Considerations
? Carefully check all references; both personal and credit.
? Define job descriptions clearly and make sure all employees know who to report to if a problem arises.
? Avoid having “indispensable staff” who alone know all the workings of a particular part of the business.
? Many frauds require regular activity by the fraudster make sure everybody takes regular breaks and vacations from work.
Working Environment
? As noted above, have a clear policy whereby all irregularities will be dealt with, no matter how small. Set an example from the top employees will follow the example of management.
? Make full use of internal auditors or non-executive directors who will be in a position to provide objective advise.
? Dissatisfied employees are more likely to be tempted by fraud. Treat everyone as part of a team and recognize the contribution each person makes. Just remember, a fraud in the company leads to the workplace morale being badly affected. Respect for management becomes damaged and staff turnover, particularly of good employees, is likely to increase.
? Set up a fraud hotline whereby employees may call a 24-hour anonymous service to report any suspected fraud and abuse.
In summary, the best way of preventing all types of fraud is to develop a work climate that makes theft difficult. Measures such as instituting and maintaining cost-effective deterrents, taking action against any group or individuals found to be stealing, and encouraging employees to be vigilant and report suspicion of fraud, are not only excellent steps to reduce the risk of fraud but will lead to increasing a company’s bottom line profit. Remember, it is always better to have a fraud prevention policy and program than a costly fraud investigation.
Donald J. Snyder, CPA, is an Audit Partner with Alder, Green & Hasson LLP, a full service accounting and business consulting firm. Don specializes in auditing, accounting and consulting services, serving the manufacturing, wholesale/distribution and waste industries.
