Written by Tracy L. Coenen, CPA, CFF
Family Ties – Newsletter of UW-Madison Family Business Center
Cost-saving measures are often attractive to businesses. If a company with annual revenue of $10 million could eliminate a $600,000 expense, would management be interested? It can be done, and internal fraud prevention is the key.
Companies lose an estimated 6% of revenue each year to fraud committed by employees. With today’s amazing shrinking margins, 6% could be a company’s entire profit for the year. That loss figure doesn’t even include the costs of investigating and litigating the cases.
Proactive fraud prevention techniques are the key to preventing internal fraud. 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.
A full-blown fraud prevention program is the best way to protect the company’s assets, but a few basic procedures can start a company on the path toward preventing internal fraud.
Step One: Companies must hire the right employees. This can be easily accomplished with background checks, reference checks, employment verification, and credential verification. It is surprising how often a reference check or employment verification yields valuable information that disqualifies a candidate.
While some former employers are reluctant to provide information because of the fear of lawsuits, many will give direct or indirect information about a former employee. Some may say that they would not rehire the employee if given the chance. Others may be more direct and say that the employee was fired for theft.
Step Two: Implement policies and procedures specifically designed to prevent fraud. This step is easily the most extensive part of preventing fraud, and the involvement of an anti-fraud professional is the key to effective implementation.
Businesses often refer to these policies and procedures as “internal controls”, but the traditional internal controls implemented by auditors and accountants do not have enough anti-fraud muscle behind them. Additional procedures that prevent fraud should be implemented, and these would include new authorization levels, separation of critical duties, and oversight of vulnerable areas.
Step 3: Educate employees. Studies have shown that employees can be a company’s best watchdogs, as internal frauds are very often discovered via tips from employees.
I’ve never met a business owner who is happy to have profits walk out the door unchecked. Proactive fraud prevention is a cost-effective way of stopping internal thefts.
Tracy L. Coenen CPA, MBA, CFE is the president of Sequence Inc, a forensic accounting firm with offices in Milwaukee and Chicago.