Prevent Fraud: Look for These Warning Signs

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When attempting to prevent corporate fraud, management must be aware of the warning signs and be willing to identify operational risk factors and implement effective solutions to the problems.

Operational red flags are among the most important red flags of fraud to be aware of. These are ways that the company’s operations may make it easier for someone to commit fraud and get away with it. Operational red flags of fraud can include some of the following:

  • Operating in “crisis mode” or “fire drill mode”: When companies don’t establish “normal” operations because there is always a crisis, it becomes next to impossible for employees to determine when something out of the ordinary is going on. A constant state of chaos means that it’s hard to pay attention to details, and things that might otherwise be considered unusual won’t be flagged.
  • No clear lines of authority: Employees must understand the pecking order within a company. If they do not, they will be unclear about who receives complaints, and they may be less likely to report suspicious behavior. Even in companies that utilize the “team” concept throughout, there is still a chain of authority that should be clear in case of trouble.

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The True Cost of Fraud

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When we think of on-the-job fraud, we tend to think in extremes. One extreme is the teenage punk with orange hair and a nose ring, and he’s stealing cash out of the register or letting his friends have free chips and soda. The other extreme is that of the wealthy executive who runs off with millions by extracting lavish gifts and manipulating the company’s financial statements to boost the stock price and enhance his bonus.

The problem with these extremes is that they fail to consider the majority of thefts that go on within companies. Most occupational fraudsters steal between $10,000 and $500,000 from their employers. While these dollars can be significant to companies of varying sizes, they only represent the dollars directly taken by the employee.

A company’s cost of fraud goes far beyond the initial sums of money stolen by a dishonest employee. These costs range from some tangible negative effects, to other less tangible results throughout the company. One way or another, they all cost the company time, money, productivity, and potentially customer relationships. Continue reading

Be Prepared: Think Like a Thief

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Fraud is committed by real people. They have real families and real jobs. They often are just like you and me. But what makes thieves different from a lot of us is their ability to lie and steal. Most of us would never seriously consider taking something that does not belong to us, especially not significant sums of money.

But thieves are different. Those who commit fraud have taken that which is not theirs. They have cheated others. They have covered up their lies. What makes it okay in their minds to commit fraud? What is it about their moral code that allows them to steal? How do they justify their actions?

The answer is found in the fraud triangle, an old concept in criminology that still has wide acceptance in the fraud examination field. In order for fraud to occur, three things must be present, and each represents one side of the triangle. The three pieces of every fraud puzzle are opportunity, motivation, and rationalization. These are key to explaining why a fraud occurs. Continue reading

How to Stop Employees From Stealing

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It might be hard to believe, but each and every day companies are losing money because they not only give employees opportunities to steal, they encourage it.

How? By not providing adequate oversight. A clerk, for example, sees that an error in an account wasn’t caught by anyone. A purchasing manager notices that no one is watching over his vendor relationships, and won’t know it if he establishes a fake account. Employees are not stupid. They know when they are being monitored and when their work is being checked. They know when they are working in an environment ripe for fraud.

But you have honest employees, you say? You’re probably right. If we thought job applicants were criminals, we wouldn’t hire them. But situations occur where the temptation to steal simply becomes too much. Imagine owing money to a hospital or having an expensive (and necessary) car repair that you can’t afford. What if your child needs clothing or food? There may come a day in your life when your morals are challenged because you have a financial need and an opportunity at the workplace that seems too good to pass up. Continue reading

Fighting Fraud With Proactive Prevention Techniques

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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. Continue reading

Five Tips to Start Your Company on the Road to Reducing Fraud

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One of the biggest mistakes small business owners make in relation to fraud prevention at their companies is doing nothing. They often think that fraud prevention is too extensive and too expensive, so they opt to do nothing proactive to reduce fraud. The idea that fraud prevention is too difficult or too costly is simply not true.

While it is true that a full-blown fraud prevention plan at a company can be expensive to develop and implement, there are many inexpensive things small business owners can do to reduce their risks of fraud. So even if they can’t afford the best or most expensive fraud prevention solutions, there are still steps they can take to improve. Continue reading

How to Detect Behavioral Red Flags of Fraud

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According to the Association of Certified Fraud Examiners, the overwhelming majority of frauds against organizations are committed by insiders.Yet, it would be a mistake to assume that most employees who steal are experienced criminals.

In fact, many, if not most, employees who defraud their employers are fundamentally honest.They just get themselves into difficult predicaments or have personalities that are more prone to breaking the law if given the opportunity.

There are hundreds of kinds of personal problems and personality traits that can cause a normally honest employee to “cross the line.” While the existence of one or two or even just a few such indicators doesn’t necessarily mean that a person is stealing, understanding the common behavioral red flags of internal fraud can be extremely helpful in protecting the organization from a variety of frauds.

IN A JAM
Among the most common personal problems that can present red flags of fraud are substance abuse, gambling habits or other addictions. Continue reading

Take Steps to Prevent Fraud in Your Law Practice

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One of the last places you’d expect to find fraud is in a law practice. Like accounting, the practice of law is a profession in which ethics are of utmost importance. Accountants and lawyers are often too trusting of their fellow professionals, and therefore leave themselves open to the risks of fraud.

The issue of fraud isn’t limited to a law practice of a particular size. Larger firms experience fraud because there are so many people generating so many documents, that it’s easy for a fraud to get lost in the shuffle. Small firms become victims of fraud primarily because management puts too much trust in one or two employees and fails to properly supervise them.

According to the Association of Certified Fraud Examiners, the average workplace fraud costs $175,000. What would a theft of that size mean for your practice? Could your law office sustain such a fraud? The average workplace fraud goes on for two years before it is discovered. Could that be happening in your law firm? Continue reading

Independence Vital in Fraud Investigations

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Wisconsin Law JournalI would like to think that most companies are committed to doing business honestly. They try to do the right thing, and when a problem is found, they try to correct it quickly.

Even when a scandal is looming, I hope most companies would want to find the truth as fast as possible and take appropriate action.

Even when a company is committed to fixing problems, however, management does not always do it the right way. This is particularly true when it comes to investigating suspicions of wrongdoing. There are many times when such an investigation must be done by an independent party in order for the company to be in the best possible position following the conclusion of the investigation. Continue reading

How to Commit Fraud and Get Away With It

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Written by Tracy L. Coenen, CPA, CFF

Wisconsin Law Journal

If a fraud is worth committing, it’s worth committing right. A little extra effort in the commission of a fraud can go a long way toward profiting from it as long as possible. Follow these recommended steps to increase your chances of successfully pulling off a fraud at work.

Don’t Act Suspicious
Don’t be a complainer. Don’t blatantly fight the rules. Appear to go along with policies and procedures, and don’t cause trouble for your co-workers or supervisors. You don’t want to appear to be disgruntled or seem like a problem employee. Those types of employees cause suspicion. Continue reading