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July 13, 2016

How to prevent the 3 main sources of fraud

In today’s digital age, employee fraud is often overlooked as companies constantly work to prevent cyber hacks from the outside world. However, employee fraud is a consistent threat facing organizations from within, and failure to implement basic financial controls can open vulnerabilities to internal theft.

Fraudulent activity can lead to devastating reputational and financial consequences, especially if the activity occurs over longer periods of time. Companies lose an average of $150,000 as a result of fraud each year, according to the Association of Certified Fraud Examiners (ACFE). The total loss caused by companies that reported fraud exceeded $6.3 billion.

A wide variety of fraudulent activity can occur within a company. It ranges from paying wages on misrepresented overtime hours to overstating revenues in financial statements by recording sales before the terms are completed. Understanding these key risk areas and implementing the proper safety measures to control those threats can potentially save your company from significant hassle and expense. Below are a three aspects to consider: 

1. Asset misappropriation

Asset misappropriation occurs when the employees who are trusted to manage the assets of an organization, such as payroll or intellectual property, steal from the company.

Cash is the asset most commonly misappropriated. For example, an employee authorized to make and sign checks for the company may make checks payable to themselves and then change the payee’s name in accounting records. In another example, an employee could submit false receipts to overstate their expenses and receive larger reimbursements.

Although many smaller organizations have a limited number of employees to oversee day-to-day activities, it is important that no single employee is awarded too much authorization power. Divide duties among multiple employees. For example, have one employee in charge of replenishing supplies and another who reviews the petty cash receipts or credit card expenses. Monitor employees for changes in behavior, such as becoming secretive and defensive, and look for those who appear to be living beyond their means. If you notice unexplained changes in habits, double check expenses to make sure there is nothing out of the ordinary in the books.

2. Corruption schemes

Corruption schemes include bribery, conflicts of interest or kickbacks related to your company’s transactions, but tend to leave little or no paper trail. If one or more of your employees is accepting inappropriate gifts from your vendors or certain contractors do not have business addresses or telephone directory listings, your company may be the victim of a corruption scheme.

Incorporating a Conflict of Interest Policy, and requiring employees to sign off on it annually, will create awareness throughout your organization. Review all invoice documentation submitted by your vendors before sending any form of payment. Consider including clauses in your third-party contracts that grant you the right to audit their financial statements to provide further protection.

3. Financial statement fraud

Financial statement fraud is the deliberate misrepresentation or omission of data to create a false impression of your company’s financial strength. Most commonly, financial statement fraud involves manipulating revenue figures, but it can also include delaying the recognition of expenses, overstating inventory or disclosing any improper information to the public. This particular type of fraud can lead to severe consequences, including bankruptcy, financial penalties or even delisting by national stock exchanges.

To detect when this type of fraud is occurring, look to your company’s competitors to evaluate their financial performance. If your company is consistently growing while others in your industry have fallen behind, there is a possibility that your financial strength is being overstated. Another indicator is an unexpected accumulation of fixed assets, which could indicate that your company has failed to recognize expenses. Instituting corporate governance and internal controls will minimize the likelihood that financial statement fraud will go unnoticed.

Every business opens itself up to fraudulent activity when it fails to implement the proper reporting and controls. Hiring a third-party Certified Fraud Examiner (CFE) or a Certified Public Accountant (CPA) who is Certified in Financial Forensics (CFF) can help your company better understand forensic analysis best practices and establish anti-fraud policies to ultimately protect your revenues.


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