Business owners have learned to be
leery of fraud, thanks to the high-profile cases of Enron, Tyco and WorldCom and the resulting increase in
accountability via the Sarbanes-Oxley Act.
Despite heightened awareness, fraud
remains all too prevalent in today’s business world.
The Association of Certified Fraud
Examiners’ 2008 Report to the Nation on
Occupational Fraud and Abuse reports
that U.S. organizations lose 7 percent of
annual revenues to fraud. That translates
to approximately $994 billion in fraud losses as applied to the projected 2008 U.S.
gross domestic product.
And don’t assume that major corporations are the most affected. The same
report cited that businesses with 100 or
fewer employees post a median loss of
approximately $200,000 each year.
“Fraud affects all companies, and it’s not
going away,” says Ed Gojara, CPA, CFE, an
audit manager with Briggs & Veselka Co.
“It is imperative that companies implement
fraud prevention programs that feature
thorough auditing procedures and frequent
communication with employees.”
Smart Business spoke to Gojara about
the types of fraud companies face and
what measures can be taken to reduce risk.
What are the main types of fraud?
There are three primary types of occupational fraud: asset misappropriation, corruption and fraudulent statements.
- Asset misappropriation involves the
theft or misuse of a company’s assets. For
example, an employee opens an account
and subsequently forges company checks
payable to the account. Reduce the risk by
mandating a review of every endorsed
check. Also, be sure sensitive job duties,
such as accounts receivable and accounts
payable, are not assigned to the same
employee. - Corruption involves the wrongful use
of influence in a business transaction to
procure some benefit for the perpetrator or
someone else, contrary to his or her duty to
the company. For example, one of your
employees is in cahoots with one of your
vendor’s employees to retain or increase
assets purchased. They work together to
perpetrate the fraud and then split the
funds. To reduce your risk, rotate purchasing responsibilities among employees or
appoint someone outside the purchasing
department to frequently review invoices. - Fraudulent statements are the falsification of a company’s financial statements,
either for personal gain within the business
or to deceive external parties for the company’s gain. For example, an employee
reports revenue sooner than it’s realized or
fabricates it to qualify for an incentive.
Reduce your risk by conducting thorough
background checks and hiring a qualified
professional to regularly perform a full-scale audit of your company. The auditor
will closely study your finances and recommend specific internal controls.
Besides those specific methods, what other
ways can a company avoid fraud?
You’ve got to build fraud prevention
measures into your company policies.
Implement a code of conduct and organizational protocols that explicitly define the company’s policies as well as the penalties
for violating them. With policies and procedures in place, you’ll show employees that
the organization is serious about fraud.
You’ll also remove the excuse, ‘I didn’t
know I couldn’t do that.’
Create a code of conduct handbook that
every employee must read and sign. You’ll
have legal documentation that employees
know the rules and the consequences of
breaking those rules. Also, address fraud
issues with your employees regularly.
Show your employees the challenges the
company faces through an annual presentation. Help your employees understand
that if the company is hurting, the employees will be hurt, as well. Don’t forget that
honest employees are your best assets.
Create an anonymous tip line so employees can report wrongdoers.
Finally, assign someone, preferably
someone in a senior management position,
to have the responsibility of assessing
fraud risks throughout the company. This
person may or may not delegate some of
his or her responsibilities, but in the end,
he or she has the ownership.
Should companies seek outside assistance
in preventing fraud?
Your CPA firm and attorneys should have
experience with fraud risks and can help
you identify issues. No matter how strong
you believe your internal control system to
be, outside assistance is advised. Think
about the locks on your doors. You can
have the most sophisticated locks and
security systems, but if someone has the
key and knows the codes, he or she can get
inside.
Remember, too, that people in your organization can get too friendly with one another. As a result, checks and balances may
be overlooked. Even honest people can do
dishonest things if put in the right situation.
An outsider can help you examine your
company’s structure and suggest the segregation of duties where appropriate.
ED GOJARA, CPA, CFE, is an audit manager with Briggs & Veselka Co. Reach him at [email protected] or (713) 667-9147.
