Cost-saving measures are always attractive to businesses. If a company with annual revenue of $10 million could eliminate a $500,000 expense, would management be interested? Internal fraud prevention could be the key to saving money in precisely this way.
Experts estimate that companies lose about 5% of their revenue each year to fraud committed by employees. Of course, this is just an estimate, as we have no idea how much fraud goes undetected. But assuming the experts are right, 5% could be substantial. Some companies have such thin profit margins that 5% could be their profit for an entire year. (And the 5% loss figure doesn’t even include all of the secondary costs that go along with internal frauds, such as personnel costs, investigative costs, and legal fees!)
The key to preventing internal fraud is proactive fraud prevention techniques. Fraud prevention is not about putting out fires as they spring up. True prevention is about fire-proofing a company to eliminate the risk of fire. So measures must be taken in advance to prevent problems down the road. Continue reading
Fire drill training in grade school always included the mantra, “Stop, drop and roll.” This was the prescribed course of action if a child was on fire. Professionals sometimes refer to tragedies in companies as fire drills. When a major internal theft occurs, it is akin to a fire, and needs to be met with swift action.
Where there is smoke, there might be fire. Numerous red flags can point to internal theft: missing or altered documentation, unexplained accounting entries, excessive customer complaints about account balances, and disregard for policies and procedures.
While one red flag alone does not necessarily mean a fraud has occurred, numerous questions increase the suspicion of internal fraud. It is important to quickly identify the red flags, determine who might be responsible, and take quick action to extinguish the problem. Continue reading
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.
Do not discuss or display any dishonest behavior. Don’t talk about how you screwed your neighbor out of some money. Do not brag that you got one over on the auto repair shop. Don’t tell people that you filed a false insurance claim. Never daydream out loud about stealing money from someone. Dishonest behavior in your personal life can make managers suspicious about your propensity to commit fraud at work. You don’t want to give them any clues.
Never make your money problems public. Don’t say that you’re underpaid, or complain about your raise, or brag that you do much more work than you’re paid for. You don’t want to make it seem like you’re unhappy or might steal money to get back at a company that treats you unfairly. Continue reading
Internal fraud is a huge risk to companies. Experts estimate that on average it costs companies 3% to 5% of revenue each year. When profit margins are thin, internal fraud can literally put some companies out of business. Executives are prone to underestimating the amount of fraud that exists within their companies. They want to believe that their internal controls are better, their employees are more honest, and their ability to stop fraud is more effective than that of executives at other companies.
The truth is, they are often unaware of all the frauds committed within their company’s walls. Indeed, fraud is often hard to find and may be hidden among the seemingly more trustworthy employees, those who are necessary for keeping the business running. They are the ones putting companies at risk; they have access to assets and information and the opportunity to steal and cover up fraud. Continue reading
As victims of occupational fraud reflect on crimes committed against their companies, they wonder if there were any signs that a fraud was occurring. They wonder how a trusted employee could steal from the company. Sadly, frauds are committed by people in positions of trust. What is it about those people that leads them to commit fraud?
Corporate thieves have many things in common with one another. There are many tell-tale characteristics about people and their lifestyles that signal the potential for fraud. These range from personal financial circumstances to attitudes on the job. A few of these traits alone do not indicate the potential for fraud, but the probability rises as we identify more of the characteristics.
Employees who steal from their employers often appear very dedicated. They work long hours and seem willing to take on extra responsibilities. For a normal person, these would be desired traits. An employee who helps accomplish more is seen as an asset to the company. For someone with the potential for fraud, however, these characteristics are worrisome.
Where can employees, outside consultants, and board members look for evidence of override of internal controls? This isn’t a simple list of numbers or documents that must be checked off. Instead, looking for improper override of controls requires looking for red flags that point to something being amiss.
- Complete an analytical review, looking for unusual changes between periods in terms of dollars and percentages.
- Look for large, round numbers that enhance the financial position, especially if these numbers just happen to occur at the end of an accounting period
- Examine reversing entries at the beginning of an accounting period, looking for evidence that these entries relate to an improper entry at the end of the previous period
- Determine whether transactions have been completed on an arms’ length basis, and with legitimate business partners
- Look for evidence of undisclosed relationships or agreements
- Listen carefully to employees who may be reporting wrongdoing or hinting that there is a problem
I’ve been investigating fraud for over two decades. When I first started, financial fraud wasn’t a big topic. In fact, most people had never heard of forensic accounting. Then in 2001 and 2002 everyone became more aware of the issue of fraud when the big frauds of Enron, WorldCom, and Tyco became public. It is now commonplace to hear about corporate frauds involving embezzlement, financial statement manipulation, or kickbacks.
Despite this knowledge, there are still many misconceptions about employee fraud. If owners and executives mistakenly believe their company is not at risk, they are probably not actively preventing fraud. Management must know the truth about fraud and its perpetrators in order to actively protect the company.
Here are five myths about fraud that I still run into in my forensic accounting practice. They’re often unspoken, and many would never admit that they believe them. However, I know from experience that they run rampant.
1. Our company doesn’t have an internal fraud problem.
While companies would like to believe they have good employees and adequate internal controls to prevent fraud, the fact of the matter is that studies suggest 75% of companies will fall victim to a fraud scheme. While some of these may not be large frauds, they will cause losses nonetheless. Continue reading