The Business Acumen Series: Low Cost Strategies to Detect and Prevent Business Fraud
An insidious force haunts the halls of every business, large and small — the risk of fraud. While many fear the specter of fraud, far too many fear the cost of addressing their fraud risk. Preventing and detecting fraud can be expensive in terms of time, money, opportunity cost, and human effort; however, the cost of ignorance is far greater.
According to the Occupational Fraud 2022: A Report to the Nations, as published by the Association of Certified Fraud Examiners, participants estimated losses of 5% of revenue per year for the typical organization due to fraud, with a median loss of approximately $117,000.
These figures only represent the monetary value of fraud, and do not even begin to touch upon the dramatic impact on reputation and morale a fraud can wreak upon an organization.
So how do we begin to address our fraud risk in a cost effective manner? There are simple internal controls that can be implemented which involve relatively low cost (time, money, etc.) while providing good value in terms of fraud risk mitigation. Let us explore just a few of these controls which you can implement in your organization today to lower your fraud risk.
Review of Bank Statements
One of the most overlooked internal control mechanisms is the simple review of bank statements and copies of cancelled checks by an individual other than the employees in charge of reconciling the bank statement or signing the checks.
In small and mid-sized businesses, the owner/president, or another individual with appropriate authority, should directly receive and open the bank statement (if mailed) or otherwise obtain the bank statement directly from the bank (online access) every month. This individual should then review the bank statement and check images carefully, searching for unusual vendors, suspicious signatures, check amounts above approved thresholds, checks to employees or related parties, checks made out to cash, alterations to checks, and any other unusual activity.
The reviewer will certainly need to be knowledgeable about the company’s vendors, customer refunds, and other relevant organization information to be effective in this endeavor. This review is typically not overly time consuming and provides the opportunity to detect fraudulent activity.
Mandatory Vacation Periods and Job Rotation
Another effective internal control mechanism involves two related controls, mandatory vacation periods and job rotation. In perpetrating many fraud schemes, a fraudster needs to continually perform activities to commit the fraud and cover their tracks.
The simple act of having a different employee perform a particular job function for a few weeks can quickly bring a fraud scheme to light. Likewise, requiring employees to take time off, in solid week-long chunks, can also uncover fraud schemes as the perpetrator lacks the opportunity to engage in their fraudulent activity for a period of time. Most employees will not argue with a boss who requires them to utilize their vacation time and taking time off is generally good for employee morale.
Also, having employees cross-trained on various job functions is a good business practice and helps the company maintain efficient operations when employees are on vacation, traveling for business purposes, parental leave, or when unexpected events otherwise disrupt an employee’s ability to work for a period of time.
Separate Bank Account for Wire Transfers
This next control recommendation is geared toward preventing external fraud against an organization. Many businesses accept payments via wire and provide customers with bank account information to complete the transaction. A simple control, which is not too costly, is setting up a separate bank account for such transactions and sweeping any received funds out of the wire account and into the company’s main account daily (or more often as volume dictates frequency).
A fraudster will use account information in nefarious ways, so why provide them the opportunity? A separate account which contains little or no funds at any given time is a much less attractive target. In addition, while domestic fraudsters can be handled by local or other U.S. authorities, international fraudsters such as criminal rings based in other countries, will be far more difficult to apprehend and prosecute. As such, if you have sales outside the U.S., a separate account for wire transactions is prudent.
There are numerous ways to prevent and detect fraud and countless controls for mitigating fraud risk. The aforementioned controls are low cost, high value mitigation methods and these controls, especially the internal controls, increase the perception of detection which most fraud fighters will tell you is the most important tool in preventing fraud from occurring in your organization.
The Occupational Fraud 2022: A Report to the Nations is published by the Association of Certified Fraud Examiners and can be viewed and downloaded for free on their website www.acfe.com.
