Fraud is defined as “any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain”, based on a report from the Association of Certified Fraud Examiners (ACFE) entitled Managing the Business Risk of Fraud: A Practical Guide. Every organization, regardless of size, is subject to potential fraud that could lead to lost revenue, costly legal fees, investment losses, and even the collapse of the entire organization. Recent research points to the fact that a typical organization loses 5 percent of its revenues due to fraud each year. As such, being hyperaware that no organization is impervious to fraud is critical to prevention.
Small businesses that suffer fraud often take the biggest hit, as the losses are often disproportionally large. While types of fraud vary drastically, three major categories represent the most common forms:
- Asset Misappropriation: the majority of fraud cases fall into this category, where an employee exploits or steals from the organization.
- Financial Statement: intentionally misstating or omitting information in the organization’s financial reports.
- Corruption: the violation of an employee’s duty to the employer where influence is used in business transactions for that employee’s own benefit.
Fraud risk must be on the forefront of governance principles, from the board of directors and senior management to personnel at each level of the organization. Adequate prevention lies in the organization’s ability to communicate and regulate the company’s policies and training to stop fraud. A lack of anti-fraud controls can quickly lead to massive losses, therefore making it absolutely critical to create and enforce a procedure that starts at the top of an organization and trickles down to the bottom.
Establishing a fraud risk management program is essential to creating an atmosphere where everyone in the company is aware of the potential criminal and civil actions that would be taken if fraud were to occur. Communication across the company must highlight the following:
- Human Resources Processes: from background checks to anti-fraud training, the human resources department must take an active, leading role in fraud prevention
- Third-Party Checks and Balances: far too often fraud involves third-party transactions, thus requiring preventative measures that evaluate both internal and external dealings
- Limitations on Authority: segregating duties, limiting access, and giving individuals authority that matches their responsibility in the organization is an excellent safeguard in preventing fraud
In addition, practices such as random audits and rotating job roles will help to eliminate the potential for fraud. It is also important to recognize the difference between fraud prevention and fraud detection. While the two are certainly related, detection focuses on actionable programs that are meant to identify fraud and/or any misconduct in an organization while it is occurring or after it has occurred. Detection techniques must be paired with prevention policies to uncover where fraud has taken place. Unfortunately, even the best prevention plans can fail and when this happens, the ability to detect red flags and foul play is imperative to protecting the company.
Investigating fraud and the taking corrective action will likely involve an external investigation team. From fraud investigators to legal counsel and from internal/external auditors to forensic accountants, building a powerful team is indispensable. For more information regarding fraud prevention in your organization, contact Moore, Ellrich & Neal, P.A. at your earliest convenience.