The Fight Must Go On
Recent Fraud Statistics and a Declining Economy = Great Risk
Raymond H. Dunkle, ASA, CPA, ABV, CVA, CFE, CFF
Director, Brockman, Coats, Gedelian & Company – (330) 572-8046
Over my career I have worked with numerous business owners who were victimized by fraud; fraud perpetrated by their own employees. Never, not even once, have I heard “I expected that he’d do that to me someday” or “I saw that coming from the time I hired her.” That does not happen. Victims of fraud are victimized because they put too much trust in a few people and too little emphasis on strong internal controls.
Generally, fraud occurs when 1) significant faith is placed in an employee, 2) that person faces some sort of pressure (debt, greed, peer pressure, addiction, etc.), and 3) that person is able to rationalize inappropriate behavior. It also occurs when business owners 1) falsely believe that improved internal controls will be costly or cumbersome, 2) are afraid to offend employees by strengthening internal controls, and 3) blindly trust their employees.
How Bad is the Problem?
Here are a few interesting statistics from the Association of Certified Fraud Examiner’s (ACFE) September 2008 “Report to the Nation”:
· The average fraud had been going on 2 years before it was detected,
· The median losses were $175,000,
· Privately held companies were the most common victims of fraud (followed by public companies, governmental entities and not-for-profits),
· Members of the Accounting Department and/or upper management accounted for 46.7% of all frauds,
· 87% of fraudsters had never been charged or convicted of a crime; 83% had never been terminated from a prior job,
· More than 50% of fraudsters had worked for their employer for more than 5 years,
· Fraudsters were typically men (59%), but women (41%) were commonly culprits too, and
· Organizations who had invested in anti-fraud controls suffered substantially less damages than those who had not.
Why me?
As the economy continues to struggle, fraud investigators are expecting an increase in fraudulent financially activity. To this end, the FBI recently announced it is doubling the number of special agents focusing on financial crimes. Why should you be worried about preventing fraudulent activity? Because the risk is real. Many victims have experienced the unpleasant shift from the confident assertion “It will never happen to me” to the humble question, “Why me?”
What’s a Person to do?
Here’s a clue…”nothing” is not the right answer! Through employee training, improvements to internal controls and policy implementation, damages can be reduced substantially. For example, the ACFE’s 2008 report noted that:
· Organizations conducting surprise audits averaged $70,000 in losses when victimized by fraud; those who did not averaged $207,000,
· Organizations with fraud hotlines averaged $100,000 in losses when victimized by fraud; those without averaged $250,000,
· Organizations training employees averaged $100,000 in losses when victimized by fraud; those not providing training averaged $208,000.
These are just a few of many examples of cost effective procedures a Company can implement. Additionally, making sure that you are adequately insured and employees are properly bonded can minimize your losses.
The Economy is Bad – I Don’t have $ for That
Really? With one small exception, the most I have ever charged a Company to improve its anti-fraud stature is less than the least I have ever charged to investigate a fraud after it occurred…and my fees for the investigation obviously did not include the losses associated with the fraud itself. One client best put it this way, “Ray, we have fire insurance, as we should, but we will probably never use it. We did nothing to try to prevent fraud, and the odds were high that we’d fall victim to it.” I could not have said it better myself.
In the End…
In the end, business owners are faced with important decisions. On one hand, the economy is tight and funds are too. On the other, a down economy leads to increased pressures for employees…a driver of fraudulent activity. On one hand, employees in the accounting department may be resistant to change. On the other, they are the leading source of fraudulent activity. On one hand, employers may be afraid to offend long-time employees. On the other, victims would never suspect the fraudster…that is how they become victims. When dealing with the Soviet Union, Ronald Reagan was famous for his signature line “Trust but verify.” When dealing with employees trust but verify…it may save your business.
