Are your company’s funds safe on the inside of your organization? As the Starks say in Game of Thrones, “Winter is Coming!”
Some types of fraud are inevitable, and businesses should be prepared! Are you too trusting? Consider this example:
Brice is the owner of a gym. Brice sees that his competitors have a great online presence, and he suspects he may be losing both old and new customers because he does not feel relevant online. Brice doesn’t have any experience with online marketing and social media presence. After a few discussions with his sales manager, Damian, Brice agrees to invest $120,000 with an online web development/marketing company to solve his online issue.
In the meantime, Damian created a shell online web development/marketing company and website named SalesToGo. Damian made SalesToGo seem to be a premier provider in the marketplace. Then, Damian hired some cheap contractors that SaleToGo paid to perform Brice’s work for $45,000. Damian explained and handled all of the details for Brice. For the first few months, Brice thinks he is in great shape with his new online presence. Six months later, Brice realizes that his online marketing and social media efforts didn’t bring any new customers to the gym and he has lost many of the old ones. So, Brice offhandedly discusses this with another online marketing company representative who is still going to his gym and finds that he paid an unusually high amount for this service. This raises Brice’s suspicions, so he investigates and finds out the details of Damian’s scheme.
So, how could this happen? There are many ways, but as in Brice’s case, owners may trust too much. Often assets are stolen because the opportunity presents itself. Your business may have poor accounting controls or a lack of segregation of duties. Greed, financial hardship, arrogance or complacency are just a few of the reasons that fraud begins.
Fraud is more common in small businesses than you may expect. Asset misappropriation (that is, stealing from your company) can occur through the theft of cash, cash receipts or other assets, or it can be accomplished through fraudulent disbursements. According to the Association of Certified Fraud Examiner’s 2016 Report to the Nations on Occupational Fraud and Abuse, in 83.5% of the cases they uncovered, there was a median loss of $125,000 to the businesses who discovered asset misappropriation. The CFEs (Certified Fraud Examiners) who participated in the report estimated that a typical organization loses 5% of revenues in a year as a result of fraud.
So, how can you detect fraud?
Most commonly, fraud is detected by tips from employees. Next, internal audits and then thirdly management reviews are the most common ways of initially detecting fraud.
Encourage your employees to provide you tips.
Many businesses have written policies within their employee manuals that spell out specific structured reporting processes for cases where employees have potential information. In businesses without these policies, employees may feel vulnerable especially if the potential fraudster is their supervisor.
Instilling a tone at the top that encourages openness, honesty, integrity and ethical behavior will go far in encouraging employees to report fraudulent behavior.
Establish written policies for handling and recording cash, receipts, and disbursements.
Ideally, the underlying procedures should involve more than one employee in order to segregate functions. Your accountant should conduct an internal review and document current internal controls, which may point out potential areas of fraud. From this documentation, you and your accountant can determine ways to conduct management reviews that may provide you with more confidence that your assets are protected.
Perform periodic tests or reviews of your receipt and disbursement functions to look for obvious issues.
Testing should include initiating automated controls, monitoring vendor performance, and pricing and initiating tight analytical and budget reviews.
Most perpetrators of fraud are not sophisticated, but you have to beware because based on the odds, Winter is Coming!
Article Contributed by Barbara K. Walker, CPA, MBA, CGMA
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.