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Fraud….You're more at risk than you think!!!

Fraud… You’re more at risk than you think!!!

Fraud… this is a word which no business owner wants to hear.  It is also a word which many people just choose to ignore.  Many small business owners choose to ignore the notion that fraud could be happening.  This is a huge mistake!

Periodically, the Association of Certified Fraud Examiners (“ACFE”) issues a report discussing fraud in the world today.  ACFE’s 2012 “Report to the Nations on Occupational Fraud and Abuse” has some shocking findings.  Many of these findings would interest small business owners.  

When thinking about fraud, do you find yourself making some of these comments:

I have complete control of my business and review everything.

ACFE’s report stated that about 43% of occupational frauds were found via tips, with about 50% of these tips coming from employees.  This was the largest reason that fraud was found. Management review resulted in the discovery of the fraud in only about 15% of the cases.  Often management thinks that they will find fraud on their own, but the ACFE’s report clearly shows that is not the case.  To properly control fraud in their environment, management needs more than just their own review.

Also, reported frauds lasted a median of 18 months before being detected.  Often fraud is not found quickly.  Even though you might think you are in complete control of your business, this often isn’t the case.

I am a small company; I don’t think I am subject to Fraud.

Companies that have fewer than 100 employees represented about 32% of fraud cases reviewed by the ACFE.  This was the largest percentage of any of the business size categories in the report, and shows that smaller companies are often at the most risk.  Smaller companies often have little or no anti-fraud controls.  This is a major contributor to the fact that small companies are at the most risk of fraud.

Also, in the fraud cases reviewed, small companies suffered a median loss of $147,000.  This shows that even though the company at question is a small business, the effect of fraud is still very large.

I have long tenured loyal employees – no way would they commit fraud!

Maybe one of the most stunning findings of ACFE’s report is that the longer the tenure of the employee, the higher the median loss from fraud.  Even if an employee is at a company for a long time, it is still very possible that they could commit fraud.  Employees who are at a company for a long time often develop trust from their supervisors and co-workers.  Their experience can also give them a better understanding of any controls the company may have in place to detect fraud.

Approximately 87% of fraud perpetrators have never been charged or convicted of a fraud-related offense prior to the scheme in question.  And approximately 84% of fraud perpetrators had never been punished or terminated by an employer for a fraud-related offense.  Employees who commit fraud are often seen as good, model employees, and it is very hard to decipher whether an employee would potentially commit fraud.

There may come a time when an honest employee can, at some point in their life, do dishonest things.  They could be faced with a situation in their life where they believe they are forced to commit fraud.  Your business should be protected from fraud even if you think you have the most honest employees around.

Internal Controls, what are they and are they adequate?

All companies should have proper controls in place to try to prevent and detect fraud. This often isn’t the case when it comes to smaller companies.  The most common type of factor which provides the opportunity to commit fraud is the lack of internal controls, which was approximately 36%.  Also, the override of existing internal controls represented approximately 20%.  This shows that simply having proper internal controls in place and enforcing the internal controls could do a lot to prevent fraud.  For example, a simple set-up such as segregation of duties can help your business be protected from fraud.

No way could fraud cost me and my business too much.

The median loss reported in fraud cases was $140,000.  For smaller companies, this amount is even a little higher at $147,000.  Fraud is something that could greatly affect your business.  It should also be known that if a fraud is committed, it might be impossible to get your money back.  Often, governmental authorities will not even prosecute unless the amount of the fraud is extremely high.

Hopefully, some of the findings stated above opened up your eyes to the possibility of fraud in your company.  Here at Janover, we can help your company try to prevent and detect fraud.  We can conduct an Internal Control Review and determine whether your company has the proper controls in place.  We can also provide your company with suggestions on how to improve or implement controls.  In addition, we can take it a step further and, if fraud is ever suspected in your company, we can use our forensic accounting skills and find out exactly what is happening.

Please feel free to contact our office with any questions you may have.  Let Janover help to try to keep your business safe when it comes to potential fraud.

By: Chris Gagliardi, CPA

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