No company is immune from fraud, and it’s more than likely that your business is losing revenue to fraudulent activity.
“The difficulty is that there is fraud happening at most companies,” says Lewis Baum, CPA/ABV/CFF, CVA, CFE, associate director in business valuation and litigation consulting at SS&G Financial Services, Inc. “The question is, to what extent is it happening? There are steps you can take to limit your exposure, but you’re not going to prevent it from happening.”
The average business loses 7 percent of its revenue to fraud, says Baum, adding that smaller businesses are especially susceptible to becoming victims.
Smart Business spoke with Baum about the simple steps you can take to help minimize your company’s exposure to fraud.
Why are smaller companies at a disadvantage when it comes to deterring fraud?
Companies with fewer than 100 employees make up about 38 percent of the fraud cases, partly because they don’t have the same capability for segregation of duties and controls. Smaller companies have smaller numbers of accounting staff and management and, as a result, those people are doing multiple tasks, which may compromise some of the controls.
What can a business do to limit its exposure to fraud?
The first thing is to set the tone at the top. Make it clear that management is aware of the possibility of fraud and frowns on inappropriate behavior. As part of its policies and procedures, a company needs to institute an anti-fraud policy that clearly says fraud will not be tolerated.
There should also be a code of conduct, which outlines the proper practices for an organization. This contains what behavior is expected and also requires employees to disclose any conflict of interest with relationships with a vendor, customer or key account. It’s important to know if your purchasing manager’s wife is one of the key suppliers to your company so you can determine if he’s acting in the best interest of your company or that of his wife.
The behavior of management can also be a big deterrent — or an invitation to fraud. Although they may try to hide it, it is often very clear to employees when owners or managers are fleecing the company. That’s when animosity grows. Employees feel they’re working harder than the boss, that they’re the ones contributing the most to the company and that they should be entitled to more. Then the behavior of management serves as justification for the employee’s fraud.
Managers who are there with employees, who are part of the team, who are working hand in hand with employees and giving their best efforts to further the best interests of the company are much less likely to generate that animosity.