How Exposed Are You to Insider Theft? Preventing Occupational Fraud

Business fraud is on the rise

It’s been increasing for a few years and is expected to do so. This often happens during periods of economic turmoil.

Smaller businesses are much more susceptible to fraud than larger ones.  The largest and fastest growing source of fraud comes from inside the four walls of your business. This is called Occupational Fraud.

Smaller businesses are overall more susceptible to insider theft and occupational fraud because they generally don’t have as many people in place to separate job functions and meaningful controls in place. The culture is usually open and trusting. 

Even companies who have put controls and measures in place are facing an increased threat, as layoffs and not replacing people to fill existing jobs vacancies have caused new holes and weaknesses to exist. Potential fraudsters may find plenty of opportunities to launch their schemes if they are so inclined.

To get a sense of how big of a threat occupational fraud could be to a small business, a few statistics may help.  According to a recent study by ACFE – The Association of Certified Fraud Examiners:

• The typical organization loses 5% of its annual revenue to fraud
• The median occupational fraud loss was $160,000
• Nearly one-quarter of the frauds involved losses of at least $1 million
• The frauds lasted a median of 18 months before being detected

Ask some of your business associates.  See if they have been victimized. There's a good chance they have been.

To better understand this threat, it’s worth examining the ways in which small business occupational fraud occurs.

Top 10 ways occupational fraud occurs

 

• Skimming cash receipts
• Falsifying expense reports
• Forging or tampering with company checks
• Falsifying payroll records
• Falsifying bills and invoices
• Stealing cash
• Stealing other physical assets
• Sealing intellectual assets and information
• Corruption
• Financial statement fraud

The most common frauds are not the most costly

90% of occupational frauds involve Asset misappropriation.  These cause median losses of $135,000.

Financial statement fraud schemes on the other hand make up less than 5% of the frauds, but cause a median loss of more than $4 million — by far the most costly category.

Corruption schemes fall in the middle, comprising just under one-third of cases and causing a median loss of $250,000.

All Anti-fraud measures are not equal

Anti-fraud controls help reduce the cost and duration of occupational fraud schemes. They significantly lower the losses, time-to-detection and thus the duration and financial impact of frauds.

While many small business owners believe they have adequate measures and good people in place to prevent fraud in their companies, it may be this very sense of trust that allows fraudulent activity to occur and flourish.  Even the most trustworthy employees may have a need, then see and use an opportunity to commit fraud.  The first step in combating this potential for fraud is creating an anti-fraud (zero tolerance) business culture.

Beyond this first step, there are many other anti-fraud control measures a business owner can put in place to reduce, discourage and prevent fraud.   Some are easier to implement than others, while some are particularly more (or less) effective. 

For example internal or external audits, while completely logical and worthy, are fairly ineffective in detecting frauds. On the other hand, adopting a policy whereby everyone must take their vacation (and someone else covers that job in their absence) is effective.

How can small business owners determine the most effective controls for their businesses?

Managers and owners of small businesses should focus their anti-fraud control efforts on the most cost-effective mechanisms.  This involves learning where the business is most susceptible to fraud and what types of controls are most effective to deter these fraud risks. 

Learn More:

One great way for small business owners and managers, attorneys and accountants to learn about how to deter fraud is to attend this webinar: How Exposed Are You to Insider Theft?  Occupational Fraud – Causes and Prevention

You will learn about the most effective and cost effective anti-fraud measures and how to calculate the ROI of implementing these measures in your business.

 

 

Another way to craft an anti-fraud program is to hire a professional organization which provides fraud risk assessment services, such as A B Hilton & Associates. 

Using an outside professional has the added advantage of providing an unbiased view of the business to the owner. 

They evaluate the risk and recommend appropriate anti-fraud measures for their clients. They also conduct educational events to help small business owners learn about the causes, prevention and actions they should take to protect their business.