Cooking the books Featured

9:50am EDT July 22, 2002

When the Association of Certified Fraud Examiners finished an exhaustive three-year study on occupational fraud and abuse, one of the top findings was that the most costly abuses occur in organizations with fewer than 100 employees.

Is someone cooking your books?

Occupational fraud typically starts small and continues to grow as the person grows more confident of his or her scheme. Sometimes the fraud reaches such high levels that the existence of the business itself is threatened. Because of fraud’s clandestine nature, employers are reluctant to believe it exists.

This is especially true in small organizations, where everyone knows each employee and may even socialize outside of work.

The ACFE says that trust is the cornerstone of occupational fraud and abuse. The business must seek a balance between trusting employees too much and too little. While some fraud is well hidden, most can be prevented and detected with common sense and inexpensive solutions. Consider the following advice:

  • Set the tone at the top. Employees who view their leaders as honest are more inclined to emulate that behavior. The opposite is also true. Don’t give employees an excuse to be dishonest.

  • Have a written code of ethics. A written code sets forth what the organization expects from its employees. Although many larger organizations are implementing written codes, the same cannot be said of smaller ones. Ironically, smaller companies have the highest risk of occupational fraud and abuse.

  • Check employee references. Some occupational offenders chronically abuse their positions and are simply discharged. They usually go on to other organizations where they continue their patterns of fraud and abuse. They often purposely select organizations where they know pre-screening is nonexistent.

  • Examine bank statements. A business’s unopened bank statement should be reviewed at the highest possible level. Since most occupational fraud involves skimming cash and false disbursements, a responsible person unconnected to the bank reconciliation should look for unusual patterns, dual endorsements, unfamiliar vendors and unfamiliar financial trends.

  • Have a hotline. In the ACFE study, the majority of fraud cases were discovered through tips and complaints by fellow employees. Employees are often in a position to observe improper conduct, but frequently have no way to report it without fear of retribution. Establish some way for employees to report suspected behavior.

  • Create a positive work environment. Employees frequently commit fraud as a way of getting back at the organization for perceived workplace injustices. By creating a positive and open work environment, the employing organization can often reduce the motivation for its employees to commit fraud and abuse.

    Todd Shryock ( is SBN’s special reports editor.