People often ask about the “basics” of internal fraud. Why it happens and what can be done to prevent it. The easiest way to show this is the Fraud Triangle….

 

What is Fraud?
Occupational fraud is the use of one’s occupation for unauthorized personal gain through deliberate misuse of the employing entity’s resources or assets. The Association of Certified Fraud Examiners (ACFE) estimates that typical organizations lose 5% of their annual revenues to fraud (2012 ACFE Report to the Nations on Occupational Fraud & Abuse).

 

 

 

Common Pressures:
High Personal Debt
Gambling or Drug Addictions
Personal Crisis
Overworked (fewer people doing more work)

 

 

Common Rationalizations:
I will pay it back when my next paycheck comes in
Everyone else is doing it
I am underpaid and over worked
Just this once…

It’s important to note that pressure and rationalization are most often “internal” motivators that are beyond an employer’s control. However, the one variable in the fraud triangle that is within the control of owners and management is OPPORTUNITY. Limiting an employee’s opportunity through a strong tone at the top, proper internal controls, and oversight can limit losses due to occupational fraud.

How Does Fraud Occur?
Occupational fraud predominantly occurs as:

 

 

Asset Misappropriation:
Comprises over 87% of all cases reported
Theft of Cash
Fraudulent Disbursements
Payroll Schemes
Expense Reimbursement Schemes

 

 

Corruption:
Approximately 33% of all cases reported had elements of corruption schemes
Kickbacks
Bribes
Self-Dealing

 

 

Fraudulent Financial Statements:
Nearly 8% of all cases reported were financial statement fraud schemes
Earnings management
Concealed liabilities
Timing differences
Improper disclosures

How Can Businesses Minimize the Risk of Fraud?
Make your vigilance against fraud front and center. Fraud should be discussed openly and your employees should all be trained on what to look for and pitfalls to avoid. Owners and management are responsible for setting a tone of acceptable behavior. Additionally, an anonymous tip line to report fraudulent activity is always a good idea.

 

Internal Controls Best Practices:
  • Have bank statements AND cancelled checks mailed to the business owners home. Review the bank statement for unauthorized withdrawals; review the front and back of each check to ensure they represent authorized business payments.
  • Segregate duties and make sure they stay segregated, even in periods of downsizing.
  • Perform unexpected “audits” on payments – demand backup documentation and reviews throughout the year.
  • Cash business? Verify cash is listed on the top of bank deposit slips and that deposit slip totals match bank statement totals.
  • Perform annual reviews of vendors and service providers to ensure they are legitimate.

What Should be Done When Fraud is Suspected? 
If you suspect fraud or have received information that alleges fraud has occurred, contact legal counsel for your company, notify the local authorities, and review your insurance policy to fully understand the benefits of your coverage. You may not realize it, but your insurance may cover a portion of the loss and in some cases, the cost to investigate the loss event and establish the loss amount.

Next, contact us! We can perform an independent investigation, quantify the loss, and professionally document the event. We will work with you (or your clients) to be a seamless member of your team.