Minimizing fraud exposure Featured

11:47am EDT December 27, 2005
New high-tech hazards get all the press, but businesses are even more vulnerable to a very old threat that is more prevalent than most business owners believe. In fact, occupational fraud — from the theft of cash to false embellishment of employee credentials — cost businesses $660 billion in 2004. That amounts to roughly 6 percent of a company’s annual revenue, according to the Association of Certified Fraud Examiners.

While losses may vary, no business is immune. But, says Jeff Firestone, a certified fraud examiner and manager at SS&G Financial Services Inc., a Cleveland/Northeast Ohio-based regional accounting, management and consulting firm, there are ways to reduce fraud exposure.

Smart Business spoke with Firestone about fraud risk and what systems can make firms less vulnerable to occupational fraud.

What kinds of occupational fraud threaten businesses?
Businesses are exposed to both internal and external fraud. Fraud includes collusion where employees work together with outside vendors paying money to people who don’t exist, or bid rigging with vendors. Another is stealing assets — people from the inside stealing money or materials or other assets in inventory.

The third general area where businesses are also exposed is to fraudulent statements, both financials and nonfinancials. Those range from creating false financial statements to something as simple as fudging on a resume.

What are those warning signs?
If you have an employee who is in charge of accounts receivable, for example, and that person never takes a vacation, it’s a trigger for suspicion. Also, look for relationships if the person in charge of accounts receivable is a close friend or relative or the business owner or CEO, that person could become involved in a fraud situation believing that he or she would never be suspected because the relationship would protect them.

Also, if you have someone in the organization who is shy and meek and suddenly changes drastically — has had plastic surgery or shows up with expensive clothes or driving a snappy car — that person could be suspected of fraud.

How are most fraud cases uncovered?
Up to five years ago, the number one way of finding fraud was by accident. Now, the number one way is through tips.

Personally, I think that people are generally good and would be offended if someone in their organization was stealing or getting something for nothing. In order to get tips, a system has to be in place where tips are confidential and, in many cases made to a third party.

Fraud is also found through investigations — performing internal or external audits, computer forensic examinations and other techniques. When fraud is suspected of an employee, private detectives can be used to investigate a person or situation. Either way, a system speaks to a company’s commitment to creating an atmosphere to employees that fraud will not be tolerated.

How can businesspeople create systems to prevent occupational fraud?
It has to start from the top down. If people believe their leaders are honest, they’re less likely to commit fraud. Create a corporate culture that spells out employee responsibilities to minimize the opportunity for fraud.

For example, establish a mandatory vacation policy. Cross-train employees — people who do accounts receivable and accounts payable learn each other’s jobs to create a checks and balances system.

Do background checks on prospective employees and weed out troublemakers from the beginning. Create internal controls that lay out the flow of money and responsibilities and also create fraud prevention policies.

Use employee newsletters to communicate policies, systems and a zero tolerance attitude. Do the same with clients placing a tagline on invoices asking them to alert you if they suspect something’s not right.

Also, if you’re in real estate or property management, you can use a newsletter or alert to tenants asking them to be alert to something such as a property manager collecting rent in cash or claiming an empty space is occupied.

How should business owners proceed if fraud is found?
Be aware that every situation is different. When you discover a fraud, it is a good idea to first research your insurance policy to ensure that you don’t jeopardize your coverage. Proceed cautiously. Investigate before involving the police or your insurance company.

Get a lawyer or consultant to advise you. Once fraud is proven, one goal is to get your money back. Another goal is to punish the thief, and a third goal may be to deter further fraud.

You do have a choice — once you have the facts and sufficient evidence for a case, you can prosecute. Call in the police, and to have them take the employee away in handcuffs. It’s a real deterrent.

Jeff Firestone, CPA, CFE, is a manager for SS&G. Reach him at mailto:jfirestone@SSandG.com or (800) 869-1834.