3 tips for businesses to detect and prevent fraud
No company hires someone who they don’t trust. But every year, businesses in the U.S. lose millions to occupational fraud, or an employee deceiving its organization. “Think embezzlement, cheating on taxes, and lying to investors and shareholders,” says the website for the Association of Certified Fraud Examiners.
The median loss in a fraud case in the U.S. and Canada was $120,000 in 2020, while the average loss was $1.2 million, according to a study of 895 cases by the Association of Certified Fraud Examiners. Small businesses with fewer than 100 employees had the highest median loss of $150,000, while large organizations with more than 10,000 employees had a median loss of $140,000.
“A small business likely will feel the impact of a loss this size much more than its larger counterparts,” the fraud examiners’ study noted.
Most workplace fraudsters are first-time offenders with a typical scheme lasting 14 months before being detected, according to the study.
To help prevent and detect fraud at your company, here are tips from the study, starting with “the most costeffective way to limit fraud losses is to prevent fraud from occurring.”
1. KNOW THE RED FLAGS
The fraud examiners’ report uncovered seven common red flags displayed by perpetrators, with at least one red flag being present in 85% of the cases in the study.
The red flags include employees living beyond their means, experiencing financial difficulties, being involved in an unusually close association with a vendor or customer, an unwillingness to share duties, defensiveness and irritability, shrewd behavior and a recent divorce or family problems.
Living beyond their means was the most common red flag, being present in 42% of the cases, followed by financial difficulties, found in 26% of cases, according to the study.
Fraud perpetrators also displayed other forms of misconduct before being caught, including bullying or intimidation and excessive absenteeism, with 13% of fraudsters getting poor performance evaluations.
2. ESTABLISH STRONG ANTIFRAUD CONTROLS
Internal controls help lower fraud losses and detect fraud quicker. A lack of internal controls contributed to nearly one-third of fraud cases, the fraud examiners’ report found.
Small companies and nonprofits are particularly vulnerable to fraud because they tend to lack internal controls. The average loss at a nonprofit was $639,000, the study found.
Examples of internal controls include separation of duties, an internal audit department, a tip hotline, a code of conduct, management’s certification of the financial statements, fraud training for employees, hiring an outside auditor and regular management review of internal controls, transactions and accounts.
Fraud training is important. Forty-three percent of schemes were detected by a tip, with half of those tips coming from employees, the report found. Internal audits are the second most common way fraud is discovered, accounting for 15% of the schemes ferreted out, according to the report.
3. ESTABLISH AN HONEST TONE AT THE TOP
A climate of honesty and integrity at the top filters throughout the organization, the study found. Poor tone at the top was the primary risk factor in nearly a quarter of financial fraud cases and was involved in 10% of overall cases.
Survey your employees to see if they believe management is honest, the study recommends. Have realistic and clearly communicated performance goals for employees and be sure fraud prevention goals are part of management evaluations and performance-related compensation.