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The truth about internal fraud

February 4, 2019

“Small frauds aren’t that important.” “My employees would never steal.” “If we had a fraudster, they would stand out like a sore thumb.” These are common answers from business owners over the question of potential fraud in their workplaces. In reality, that’s just not the truth. In fact, small to medium-sized businesses are the most prone to workplace fraud, and over half of victim companies don’t even realize it’s happening.

In Honkamp Krueger (HK)/HKP’s Huddle Webinar: You vs. Internal Fraud, HK audit partner, Heather Vetter, CPA, CFE, CICA, CIA®, discussed the hard truths about workplace fraud and what companies can do to prevent it.

Some quick facts:

  • Asset misappropriation plays a role in 89% of fraud schemes.
  • Certified fraud examiners estimate that 5% of annual revenues are lost to fraud. That’s $4 trillion USD when applied to gross world product.
  • Median loss to fraud for small business is twice as high as their larger counterparts. That’s a $200,000 loss to a small business owner vs a $100,000 loss to a large business owner. This is often because of less availability to resources and/or stronger sense of trust in personnel.
  • 53% of victim companies don’t recover their fraud-related losses.
  • Fraud schemes typically last 16 months before being remedied – Active monitoring of financials and documents can decrease the length of a scheme by 75%.
  • 89% of fraud perpetrators identified an Association of Certified Fraud Examiners 2018 study had not previously been charged or convicted of fraud-related offence.
  • 97% of fraudsters implement some tactic to conceal their acts like creating, altering, and/or deleting documents and transactions. The more people involved in the controls of your organization, the less opportunity they will have.

Vetter identified some key red flags to watch for including people living beyond their means, strong employee relationships with vendors or customers that seem out of place, and control issues/unwillingness to share duties.

All it takes, she explained, is a need and an opportunity. Consider the fraud triangle: Incentive, rationalization and opportunity. People don’t enter businesses as fraudsters, but with the right motive, opportunity and need, they can do unexplainable things. From writing checks to themselves, to working out deals with vendors under the table, to controlling all the accounts and processes, the possibilities are endless for how an employee can deceive a company.

“First and foremost, have a separation of duties,” Heather stressed. “You must have multiple people in the accounting system who know how to use it and who have different roles. The ultimate person in charge of the accounting would ideally have a mandatory one or two weeks off a year at which point you can check over the accounts to ensure accuracy. Getting someone else involved such as a senior manager to reconcile accounts monthly can catch fraud earlier, and always make sure to look over credit card activity.”

Establishing a code of conduct which all employees and vendors sign and fostering an atmosphere of honesty and integrity are key: Tone at the top is important.

Nonprofits are also especially vulnerable to fraud, Heather pointed out, because of limited resources and often no checks and balances.

Ultimately, she says, “Don’t let your culture blind you. Trust and loyalty are great, but they can create an opportunity for fraud.”

Watch the webinar to learn more and take advantage of HK’s fraud prevention checkup. HK staff can provide a fraud prevention checklist and is available to review processes and focus on potential weaknesses and provide guidance to help you better understand your fraud risk. Additionally, HK can conduct a modified internal audit with a focus on specific areas or perform a one-time mini audit on a certain time period to help you get a handle on your internal processes.

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