How to set a tone at the top to stop fraud in its tracks

Fraud costs companies about 5 percent of revenue, totaling about $3.5 trillion internationally, according to a 2012 report by the Association of Certified Fraud Examiners.

“It can have impact beyond the initial financial loss,” says Mark Van Benschoten, CPA, a principal at Rea & Associates. “Fraud damages the reputation of a business, which could lead to a loss of revenue and loss of jobs; there can be a spiral effect. Stopping fraud is about protection of the corporate entity.”

Smart Business spoke with Van Benschoten about fraud and how companies can protect themselves.

What are ways that employees commit fraud?

Some of the most common fraud happens because of inadequate segregation of duties, not communicating consequences, employee turnover, crisis conditions and poor communication. However, there are so many specific ways fraud is committed. Actually, employees who are determined to steal find new ways all the time to try and bypass a company’s systems.

What should a business tell its employees about fraud?

It’s important to set the tone about fraud from the top. Employees will react to the tone of the business owner. They may also read an owner not taking a stand on fraud as a signal that it’s OK. Business owners and management have to make it clear that they take fraud seriously and it will not be tolerated; they want to hear about what’s happening in the business. Consider putting an ethics hotline in place so your employees can anonymously report what they see.

A hotline sounds like Big Brother watching, is it?

An ethics hotline is one of the most cost-effective means of combatting fraud. In fraud cases where there is a hotline in place, the average loss is $100,000. Compare that to a company without a hotline and the amount rises to $180,000.

It’s not a matter of tattling on a co-worker. It’s about job creation. It’s about protecting the corporate image. The amount stolen from a company is one thing, but the potential losses that could happen from the negative impact on a business’ image could be devastating. This gives employees the opportunity to protect their jobs as well as those of the other honest people they work with.

There are other benefits, too. For example, if someone at a company uses a forklift in an unsafe manner, any employee that witnesses the situation can call the hotline to report it anonymously. Management can then rectify the situation and avoid a costly accident.

If a company has an audit, isn’t that enough to catch fraud?

Audits are not specifically designed to catch immaterial fraud. Audits do provide reasonable assurance about the presentation of the financial statements in coordination with Generally Accepted Accounting Principles. No auditor can, or will, guarantee that an audit will catch any case of fraud.

In most cases, someone has to speak up internally for fraud to be discovered. An outside auditor is only there once or twice a year, and his or her job is to ensure there is good financial reporting.

What other steps can companies take to prevent fraud?

It’s important that businesses have good internal controls in place. In situations where the owner is very involved with every aspect of the business, different checks and balances would be needed than in instances where the owner is hands off. With internal controls, you have to weigh costs versus benefits. It’s about how much you’re willing to pay to manage risk. You wouldn’t spend $11,000 to save $10,000.

It would be nice to say ‘do these three things and you’ll be protected,’ but there is no one-size-fits-all solution. Preventing fraud is about limiting opportunity, having good internal controls and making sure employees understand that fraud will not be tolerated by anyone — from the top down.

Mark Van Benschoten, CPA, is a principal at Rea & Associates. Reach him at (614) 889-8725 or [email protected].

Learn more about implementing an ethics hotline at www.reacpa.com/red-flags.

Insights Accounting is brought to you by Rea & Associates

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