Jul 19, 2010

According to the Association of Certified Fraud Examiners (ACFE), businesses lose an average of 6% of revenue each year to fraud, totaling some $3 trillion lost globally every year.  ACFE believes fraud could account for as much as one-third of the business failures in the United States.  Embezzlement is the number one financial crime and has been for the past thirty years, according to the FBI.  The average embezzlement lasts 18 months and results in a business loss of $160,000.  25% of all losses are for more than a million dollars.

As a business owner or CEO, you cannot afford to ignore fraud, it happens all the time to good people and otherwise astute business owners and operators.  Smaller companies are generally more vulnerable because they tend to have fewer internal controls.  Preventing fraud is much better and easier than detecting it.  Embezzlers are generally tough to catch; most are caught by accident or because of an anonymous tip from another employee or person.

There are certain actions you can take to prevent fraud.  First, this is a crime of opportunity. You need to have good internal controls in place to discourage fraud.  You should have well-designed internal controls to ensure segregation of asset custody and recordkeeping.  For example, if a person is responsible for cash deposits, they should not also be in charge of keeping your accounts receivable records.  Payroll check distribution, timekeeping, and employee master file maintenance should be done by different people.  You never want to put someone in a position where they can both perpetrate and conceal fraud.

 Common areas of fraud include paying fraudulent expenses, bid-rigging, kickbacks, false sales, false vendor invoices, accounts receivable “lapping”, and check tampering.

There are some things you should do to deter fraud: 

1.      Set the tone at the top.  Dishonesty should not be tolerated and you should have a zero tolerance policy about it.

2.      Develop the right controls and business practices and make sure they’re followed.

3.      Make sure different people are responsible for asset custody and recordkeeping.  Keep banking and cash separate from accounts receivable and keep procurement separate from accounts payable.  Have someone other than the check preparer sign and approve all disbursements.

4.      Insist everyone take vacations.  Many frauds are accidentally discovered when a perpetrator is away.  Consider periodic job rotations.

Know that a normal CPA audit or book review is not designed to detect fraud and the engagement letter will explicitly state that exclusion.  In any event, you should have a professional help evaluate your internal controls and business practices.  An ounce of prevention is worth pounds of cure!  Consider hiring a financial watchdog or make arrangements with a professional to come in periodically so potential thieves know someone is watching.

Your intuition is rarely wrong, take steps to protect yourself from fraud. 

Got fraud? You need to know!





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