Fraud is ever present in today’s business world and many companies are concerned with the possibility of it occurring within their own organization. No matter how well you run your business or how well you may know and trust your employees, no organization is not susceptible to fraud.
Smart Business spoke with Michael Maloziec, Accountant at Cendrowski Corporate Advisors, to discuss how a company can prepare itself and prevent the possibility of fraud.
How large of an impact can fraud have on an organization?
The latest Report to the Nations, which is a research study conducted by the Association of Certified Fraud Examiners, found that a typical organization loses 5 percent of revenues each year to fraud. Although that does not sound like a significant number, if applied to the estimated Gross World Product, this 5 percent equates to a potential global fraud loss of nearly $3.7 trillion. The ACFE also reported that the median loss cause by frauds in the study was about $145,000.
Where within an organization is the risk of fraud greater than others?
One of the most vulnerable areas to keep an eye on would be cash. Make sure this part of the business is well-controlled and there are a set of solid standards in place, such as segregation of duties. Organizations need to make sure that more than one person has control of the bank account. The employee working on the bank reconciliation should not be the same person who is writing checks and making deposits. Additionally, the bank statement should be reviewed each month for any suspicious or unexpected activity. Having solid standards can help prevent many fraud schemes before they even develop. However, a fraud can only occur if it possesses three distinct elements.
What are these three elements of fraud?
Every fraud situation will have each of the following three elements present: motive, rationalization and opportunity. These three elements are known as the fraud triangle.
Motive describes the compelling need for funds which drive the perpetrator. This could be anything from lifestyle needs or behavior such as a gambling addiction.
Rationalization describes the mindset of the perpetrator in which they rationalize their fraudulent acts and believe what they are doing is not a crime.
The last element of the fraud triangle is opportunity. Opportunity generally occurs because of a control lapse. Fraud deterrence focuses on removing one or more of these three causal factors of fraud. Motive and rationalization are generally dependent on personal situations in which the organization has very little control over. Since the opportunity element is controlled by an organization, this is often the most targeted aspect of fraud deterrence. Fraud is not a random occurrence and only happens in situations in which the conditions allow for the fraud to happen.
What are some ways organizations can prevent fraud?
A recent study revealed that having a set of strong internal controls in place would be the most effective method of preventing fraud. Internal controls close the door on opportunity. The presence of anti-fraud internal controls can contribute to the reduction of fraud by upward of 66 percent. Also, it is imperative that management review and enforce your company’s internal controls. Without enforcement, the internal controls will not stop the opportunity for fraud.
How can internal controls help an organization?
Control activities help ensure a business process produces valid transactions, and that financial statements are accurate. To be valid, a transaction must conform to several standards such as being completely and accurately recorded, legitimate and recorded in a timely manner.
Additionally, monitoring controls are intended to ensure that transactions not conforming to these standards, raise red flags, and the transaction is quickly identified and corrected. The opportunity for fraud and financial misstatement exists where control procedures are not effective in achieving these standards.
What happens if you suspect fraud within your organization?
If your company suspects a fraud has occurred, it might be helpful to retain a forensic accountant to investigate the matter. They can help your organization design anti-fraud control processes, which will mitigate future risks. Forensic accounts can also quantity the economic damages if a fraud has occurred. ●
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