Can Fraud Investigations Reduce Fraud?

When consumers think about investigating fraud, they do not usually think of the investigation as part of an overall plan to reduce fraud in a company. An investigation is typically seen as a reactive process that is only engaged in when a major problem is identified. Fraud investigations are representative of something completely negative, and … Read more Can Fraud Investigations Reduce Fraud?

Prevention After Finding Fraud

After a company has experienced internal fraud and has investigated the situation, how do they address the issue of fraud prevention?

Moving forward after an internal fraud requires that management actually make good on promises to prevent future frauds. It is sometimes difficult to get management to make changes, because they view changes as another cost on top of the cost of the fraud and the investigation. But shoring up internal controls is necessary if the company really wants to improve after a fraud.

The wise members of company management are interested in remediation after an internal fraud is discovered, and often they look to the fraud investigator for guidance in this area. It makes sense to have someone well versed in fraud schemes help management make improvements for the future.

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Family Lies: Fraud in Family Business

Trust is inherent in any good business. We continuously place trust in our employees and in those with whom we do business. But that trust which is so necessary to the operation of a business is also the impetus for thieves to profit.

It is unfortunate that fraud occurs when and where you least expect it. Blood may be thicker than water, but that doesn’t protect a company from theft by family members. In fact, it may be just that trust between family members that is exploited by a dishonest sibling, uncle or cousin.

Some fraud experts suspect that fraud occurs more often in family businesses than other businesses, and that the increased fraud risk is due to the trust factor. Family members put more trust in one another and therefore grant one another more access and opportunities for fraud. The controls in family businesses may be lax, particularly as they relate to the oversight of management’s activities.

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The Fight Against Fraud: Arm Yourself With Prevention

Fraud is big business. Companies are at the greatest risk of fraud from their employees, since the employees have easy access to information and assets. Some experts estimate that companies lose 5% of their revenues to internal fraud. At a company with annual sales of $100 million, that means that $5 million is walking out the door each year.

Executives tell themselves that their company isn’t the norm. They do better than average. They certainly haven’t been a victim of internal fraud to the tune of 5% of revenues. The sad truth is that they don’t know exactly how much has been stolen from their companies because they aren’t aware of all the fraudulent activities committed. Five percent is an average level of fraud for a company, and it would be wise for executives to take this number seriously.

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Eliminating Opportunities for Fraud in Companies

Perpetrators of fraud have plenty of schemes to choose from when cooking up their crimes. The fraud schemes range from petty theft by lower-level employees, all the way up to management cooking up stellar financial statements to dupe investors and lenders.

Fraud prevention policies and procedures sometimes have a tendency to focus on the smaller thefts. While those types of defalcations occur most often, they are not the most expensive. The financial statement frauds are the most devastating monetarily, and therefore must be fought aggressively.

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An average company wasted $1.7 million on SOX 404 Compliance last year

Financial Executives International polled companies for the 7th year in a row to determine how much it costs to comply with Section 404 of the Sarbanes-Oxley Act. This year, they talked to 185 companies with average annual revenues of $4.7 billion.

The total average cost of compliance was $1.7 million in 2007. This is a decrease from the prior years.

The survey also asked “accelerated filers” (companies with market capitalization above $75 million) about their audit fees for 2007. The total audit fees for these companies averaged $3.6 million, up a bit from 2006.

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