The high-profile corporate fraud cases
of Enron, Tyco and WorldCom made
front page news. However, it is not just large conglomerates that are susceptible to fraud. Companies of all sizes and
across all sectors, including governmental
agencies and nonprofit organizations, can
be affected by fraud.
To avoid fraud, it is important to institute
an anti-fraud program that creates a culture of honesty and high ethics. Such a program, says Linda Saddlemire, partner at
Vicenti, Lloyd & Stutzman LLP, should be
spearheaded by the management team.
“Management is responsible for developing an effective anti-fraud program and
should be heavily involved in assuring the
proper measures are in place,” she
explains.
Smart Business spoke with Saddlemire
about fraud, how anti-fraud programs
should be structured and what course of
actions should be taken if fraud allegations
occur.
What type of fraud risks do companies face?
The most common type of fraud is mis-appropriation of assets, which is any
scheme that involves the theft or misuse of
a company’s assets. The Association of
Certified Fraud Examiners (ACFE) reported that over 90 percent of frauds reported
in its 2006 ‘Report to the Nation on
Occupational Fraud’ were in this category.
Less frequently, companies may be subject
to corruption and fraudulent financial
statement frauds. Corruption involves a
person using his or her influence in a business transaction to obtain an unauthorized
benefit, such as accepting a bribe or engaging in a transaction where there is an undis-closed conflict of interest. Fraudulent
financial statements are when a company
falsifies its financial statements to make it
appear more or less profitable.
What is the typical loss for a company that
has been defrauded?
As reported in the 2006 study by the
ACFE, which includes reported frauds
from 1,134 companies, the median loss caused by occupational fraud was $159,000
and it is estimated that U.S. businesses lose
5 percent of annual revenues to fraud.
Nearly 25 percent of the cases reported
lost over $1 million or more and there were
nine reported cases causing losses of at
least $1 billion.
How should an effective anti-fraud program
be structured?
Major elements of an anti-fraud program
include (1) creating a culture of honesty
and high ethics, (2) having proper internal
controls and procedures in place and evaluating the effectiveness of these programs,
and (3) having proper oversight in place.
Creating a culture is accomplished by
having clear codes of conduct, conflict of
interest policies and ethics policies. It also
includes creating a positive work environment by having recognition and reward
systems, equal employment opportunities
and quality professional training. Hiring
practices should include thorough background checks, and promotions and evaluations should emphasize the importance of
high ethics and values.
Proper internal controls include having
good segregation of duties, internal audit
checks and clear authorization policies for expenses. A measure commonly taken,
and required for public companies by the
Sarbanes-Oxley Act, is to have an anonymous reporting mechanism in place for
reporting wrongdoing.
Tips are the most common means of
fraud being detected.
The oversight process may include an
audit committee or board of directors.
Oversight roles should include evaluating
management’s identification of fraud risks,
implementation of anti-fraud measures and
the creation of setting the ‘tone at the top.’
What considerations should be taken into
account when implementing an anti-fraud
program?
The first thing to consider is to identify
the acceptable level of risk. Costs versus
benefits of controls always need to be considered and attention should be given to
those areas in which the risk of fraud is
greater. Computer security is often a critical element and experts should be consulted. Knowing your business and where the
risks of fraud exist is the first step.
If a business suspects a case of fraud, what
course of action should be taken?
When allegations of fraud exist, it is critical to take immediate actions. Developing
a team should be the first step, which
should include legal counsel, trained fraud
investigators, such as a Certified Fraud
Examiner, and human resources. A plan of
action should be developed and agreed to
by all parties. In some instances, you may
want to include local law enforcement at
the onset of the investigation. Assuring that
a thorough and fair investigation takes
place is critical due to the fact that these
matters are highly sensitive and litigious.
Taking the proper steps is imperative in
protecting the integrity and reputation of
your company.
LINDA SADDLEMIRE is partner at Vicenti, Lloyd & Stutzman
LLP. Reach her at (626) 857-7300 x256 or
[email protected].