How to Prevent Business Fraud

Think fraud cannot occur in your organization? Think again. No organization is immune to fraud. All organizations are susceptible to fraud whether they realize it or not. Did you know that small businesses are the organizations most susceptible to fraud? Much of this exposure comes from the “it couldn’t happen here” mindset and a lack of awareness of fraud risks and detection measures. Proactive fraud prevention and detection measures are vital in managing fraud risks. Anti-fraud controls are associated with reduced fraud losses and shorter fraud duration.

The Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse (Report) compiles information based on 1,483 cases of occupational fraud reported world-wide by Certified Fraud Examiners (CFEs). The Report provides many insights into how fraud is committed, how it is detected, and how organizations can reduce their vulnerability to this risk. According to the Report:

• The typical organization loses 5% of revenues each year to fraud.
• The median loss caused by frauds in the AFCE study was $145,000, with 22% of the cases involving losses of at least $1 million.
• The median duration of time from when a fraud started until it was detected was 18 months.
• Collusion leads to greater losses. The median loss in a fraud committed by a single person is $80,000. That number increases to $200,000 when there is collusion between two people, and to $355,000 in frauds involving three people. For frauds where four or greater people are involved the median loss increases to $500,000 and greater.
• Only 14% of organizations make a full recovery of losses from fraud.
• Greater than 40% of fraud cases are detected by a tip – half of which come from employees.

The ACFE study found that small businesses with fewer than 100 employees comprised the greatest percentage of reported fraud cases. Smaller organizations typically have fewer anti-fraud controls than larger organizations, thus, increasing their vulnerability to fraud. In addition, the smallest organizations tend to suffer disproportionately large losses due to fraud.

Fraud examiners often cite the fraud triangle – pressure, opportunity and rationalization, as the conditions that cause a person to commit fraud. In addition, most people who commit fraud exhibit behaviors consistent with these conditions, such as living outside their means, having unusually close relationships with vendors or customers. Being aware of these conditions and behavioral red flags is paramount in detecting fraud – in 92% of cases reviewed in the Report at least one of the behavioral red flags was identified before the fraud was detected.

Proactive detection measures such as implementing a whistleblower policy or setting up a hotline, management review of disbursements and bank reconciliations, internal audit procedures, separation of duties, and employee monitoring systems are vital in the prevention and early detection of fraud. Although many organizations may be audited and auditors are required to consider fraud and assess fraud risks, it is important to remember that audits do not guarantee detection of fraud. Your CPA can help you to assess your organization and develop internal controls to mitigate the risk of fraud.

Contact your MKS&H representative for more information on how we can help protect your organization from fraud.

Article contributed by Jessica Sipple, MKS&H Staff Accountant

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 advising them regarding their financial, technology and human capital management needs.

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