No matter how well-run your company may be, or how close-knit your employees are, no company is immune to fraud. Corporate fraud, misappropriation of assets and financial statement abuse are not new problems, but they still need to be closely monitored.
“Managers of companies that experience fraud are often shocked to learn the fraud was perpetrated by a trusted employee of the business,” says Adam Wadecki, manager of operations, Cendrowski Corporate Advisors LLC. “It’s important to ensure safeguards are in place protecting the firm’s assets and reputation, irrespective of the level of confidence and trust managers may have in employees.”
Smart Business spoke with Wadecki about fraud, the impact it can have on an organization and what steps organizations can take to prevent it.
What impact can fraud have on an organization?
In its latest Report to the Nation, a document summarizing results and presenting conclusions from distributed surveys, the Association of Certified Fraud Examiners (ACFE) estimates that U.S. organizations lose 7 percent of their annual revenue to fraud. When applied to U.S. GDP, this figure represents nearly $1 trillion in fraud losses.
The ACFE also found that the median loss due to an incidence of fraud is roughly $175,000 and that the most commonly cited factor that permitted fraud to occur was a lack of adequate internal controls. However, these figures may underestimate actual fraud losses. Many companies that experience fraud are reticent to disclose facts about the incident, fearing that their reputation will be damaged if customers and suppliers learn a fraud was committed at their organization.
What characteristics define a fraudster?
Less than 10 percent of fraud perpetrators have prior criminal convictions; those who commit fraud are largely first-time offenders, even though the average fraud perpetrator is older than 40 years of age. Additionally, fraudsters generally exhibit one of two behavioral traits: They either live beyond their apparent means, or they are experiencing financial difficulties. They may also be trusted employees of an organization.
Many organizational managers are taken aback when they learn a long-time, trusted employee has committed fraud. It’s an unfortunately common event that few organizations prepared for or even envisioned. However, one often-forgotten characteristic all fraudsters possess is humanity. It’s important to remember that individuals who commit fraud aren’t necessarily bad people. Even the most honest person can turn to fraud if, for instance, he cannot afford treatments for his wife’s terminal illness.
For these reasons, and numerous others, it’s important for firms to have internal controls in place that preclude the opportunity for fraud, minimizing this causal factor so that the risk of fraud is significantly decreased.