Businesses and other organizations can implement standards to avoid fraud
WILLMAR -- A small company's purchasing agent was having personal financial difficulties and worked out a deal with a vendor in which the agent would buy only the vendor's product. In return, the agent would overcharge the company and pocket the difference.
The scheme continued for about a year and half until the company noticed that its gross profit margin was going down. The company investigated and discovered it had lost more than $100,000.
The fraudulent scheme described above is among the cases studied by the Association of Certified Fraud Examiners in its 2010 report. The association studied only publicly reported fraud cases.
The report said U.S. companies and organizations lose an estimated 5 percent of their annual revenues to fraud. The report said the median loss suffered by organizations with fewer than 100 employees was $155,000 to $160,000. The fraud lasted a median of 18 months before being detected.
These organizations are typically lacking in antifraud controls compared to larger companies, which makes them particularly vulnerable to fraud, the report said.
But businesses can take steps to minimize or prevent fraud, says Annette R. Benson, a certified public accountant, certified fraud examiner and partner with Conway, Deuth and Schmiesing, certified public accountants and consultants, of Willmar.
Benson was recently designated a certified fraud examiner by the Association of Certified Fraud Examiners as a specialist in the prevention and deterrence of fraud.
Benson said she became interested in business fraud because news reports of fraud seemed to be increasing.
"I saw it as something to help my clients to prevent and deter fraud more so than come in later and be an investigator,'' she said.
Benson said clients look to Conway, Deuth and Schmiesing for assistance in improving their business practices. She offers some common traits of fraudsters and red flags to watch for:
- More than half of all cases were committed by individuals between the ages of 31 and 45.
- Median losses tended to rise with the age of the perpetrator and with the length of service with an organization.
- Fraud offenders were most likely found in one of six departments: Accounting -- 22 percent; Operations -- 18 percent; Sales -- 13.5 percent; Executive/upper management -- 13.5 percent; Customer service -- 7.2 percent; or Purchasing -- 6.2 percent.
- Most fraudsters had never been previously charged or convicted for a fraud-related offense.
Benson says a common behavioral red flag displayed by perpetrators is living beyond their means or experiencing financial difficulties. Additional warning signs are:
- Control issues; unwillingness to share duties.
- Divorce and family problems.
- Irritability, suspiciousness or defensiveness.
- Addiction problems.
- Refusal to take vacations.
Benson advises clients to establish and maintain internal controls wherever possible, adopt a code of ethics for management and employees, and set a tone at the top that fraud or unethical behavior will not be tolerated.
"It's mostly management, having their thumb on things and watching where things are going,'' she said.
Benson recommends companies establish good hiring practices, conduct thorough background checks including education, employment history and references, and incorporate compliance and reminders of company ethics and antifraud programs into regular performance reviews.
Once carefully screened employees are on the job, they should be trained in fraud prevention. The Association of Certified Fraud Examiners has repeatedly found that employee information is the prime way that companies discover and halt fraud.
"Interestingly enough, a lot of the times it's a tip or just by accident that they find it,'' says Benson. "A tip is about 43 percent of the time. Somebody is unhappy or they find out what someone else is doing or an outside source gets a tip on it.''
Benson says high-risk areas such as financial or inventory departments are obvious fraud targets. Surprise audits of those and all parts of the business are crucial, she says. A good starting point in identifying fraud risks and establishing a strategy to prevent such losses is The Association of Certified Fraud Examiners has a Fraud Prevent Check-up, which can be found on the association's website.
Benson suggests the owner look at the bank statements before giving the statements to the employee to reconcile. She recommends separating responsibilities: no employee should handle complete money transactions.
"Make sure someone else is reconciling the checkbook than the person who writes the checks,'' Benson says. "Make sure whoever makes the deposits is a different person than who records it on the books.''
Benson also recommends mandatory vacations for employees and have another individual perform the duties of the vacationing employee "so they can see if there is something going on there.''
For most firms, fraud examination is not a core business component. That's why, when fraud is suspected or discovered, it is imperative to enlist the antifraud expertise of a certified fraud examiner, says Benson. She says the certified fraud examiner credential is recognized by businesses and governments worldwide as the standard for fraud prevention and detection.
Benson sees fraud education and prevention as enhancing her firm's business and helping clients do better.
"What I hope they would get out of it is minimize their losses because they are preventing it, deterring it, instead of having to spend lots of money later figuring out what happened and have regrets then.''