Fighting Fraud With Proactive Prevention Techniques

Written by Tracy L. Coenen, CPA, CFF

Wisconsin Law Journal

Companies devote significant time and money to the task of making sure that their customers don’t steal from them. But how much time do they spend considering the risk that their own employees are stealing from them?

That risk is great, so great that the annual internal fraud losses in the United States total an estimated $652 billion, according to the most recent study completed by the Association of Certified Fraud Examiners.

Each year, the average company loses 5 percent of revenues to internal fraud. This adds up quickly, especially for companies that are operating with little or no profit margin. Five percent of that company’s revenues can mean the difference between being in business or filing bankruptcy. It pays to implement aggressive fraud prevention techniques because they can save the company significant money in the long run.

The cost to implement procedures to monitor and restrict activities is far less than the fraud risk that companies face each day.

The Schemes
Fraud committed by employees, also termed internal fraud, occupational fraud, or employee dishonesty comes in all shapes and sizes. Every fraud falls into at least one of three main categories: asset misappropriation, bribery and corruption, and financial statement fraud.

Asset misappropriations are the frauds we hear about most often. This type of fraud would include activities like inventory theft, check forgery, theft of money, and payroll fraud. The latest statistics show that asset misappropriation occurs in more than 91 percent of fraud schemes. This makes it by far the most common fraud, but it is the least expensive on a per-fraud basis, with an average asset misappropriation costing a company $150,000.

Bribery and corruption occur far less often, in more than 30 percent of frauds discovered. This type of fraud includes participation in bribes and kickbacks, and it is common for vendors to bribe employees to help them get favorable contracts or terms. The average corruption case costs a company $538,000.

The least common type of fraud, financial statement fraud, is by far the most costly to companies. It centers on the manipulation of financial statements in order to create a financial opportunity for an individual or entity. Financial statement fraud is discovered in over 10 percent of fraud cases, but the average scheme costs a company $2 million.

Some cases include more than one type of the above three schemes, which can compound a company’s losses. It is easy to see how quickly the proceeds of fraud can add up, and there are many companies that could not withstand a fraud of any of the above “average” sizes.

The Defense
The best way to prevent internal fraud is through a proactive fraud prevention program, implemented with the help of a qualified and highly experienced fraud expert. Such an expert can be extremely helpful because she or he has likely investigated hundreds of internal frauds, and therefore is familiar with fraud schemes.

An effective fraud prevention program has three major components: education, investigation, and proactive preventive techniques. The preventive techniques are the most intensive part of the program, but that does not negate the need for education and investigations.

Studies have found that internal frauds are most often discovered through tips from employees, customers, or vendors. Since employees are inclined to report misdeeds, company-wide education of employees is an important part of the fraud prevention program. Broad-based fraud education that focuses on fraud awareness should be presented to all employees, with more specific anti-fraud training for employees in positions that have more risks.

Investigating suspected fraud is an important part of any comprehensive fraud prevention program, but it should not be the primary focus of prevention efforts. Investigations are expensive and time consuming, but they can have a deterrent effect on potential thieves, so it’s important to carry out investigations to send a message that management is looking for fraud.

It is recommended that proactive fraud prevention measures play the biggest role in a company’s comprehensive plan to reduce fraud. These measures should include both policies and procedures that are aimed at preventing and detecting fraud.

Ethics policies are an important piece of the puzzle, as they outline expected behaviors for employees. They should include guidelines for general employee conduct at work, as well as specific policies as they relate to conflicts of interest, confidentiality, the acceptance of gifts, use of company assets for personal activities, and other potentially unethical behavior.

The procedures that are implemented to reduce fraud should focus on authorization of transactions and oversight of processes. By doing so, companies create checks and balances that help ensure that errors and frauds will be brought to the forefront. The company should create an anti-fraud environment in which employees readily participate because they understand that anti-fraud procedures are for their protection as well as the company’s protection.

The End Result

It may sound daunting to implement a full-blown fraud prevention program. It is true that it is not a quick and easy process, but it is well worth the time and effort. A well-designed anti-fraud initiative will need only modest updates and modifications on an ongoing basis. The program must be monitored for effectiveness and updated as business changes. The fraud prevention program will evolve as industry conditions change and the company grows.

A company committed to fraud prevention will save money through decreased opportunities for fraud and will receive collateral benefits from implementing the program. Employees proactively working together to improve the company’s condition increases morale.

The process of creating fraud prevention controls may also highlight previously under-utilized skills and knowledge of employees. The creation and implementation of anti-fraud controls often brings to light opportunities to make procedures more efficient and more effective.

Preventing fraud is good business, and if the right people are involved, it can have many positive effects on a company. Fraud prevention is not easy, but the effort to implement an effective program is easily outweighed by the enhanced bottom line, company operations, and employee morale.

Tracy L. Coenen CPA, MBA, CFE is president of Sequence Inc, a forensic accounting firm with offices in Milwaukee and Chicago. Ms. Coenen can be reached at 414.727.2361 or tracy@sequenceinc.com.

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