Fraud and embezzlement cost local
organizations millions of dollars annually. Consistent with national trends, organizations with fewer than 100 employees are the primary targets. And, nationally
and locally, there is an increase in financial
crimes in which people are colluding with
internal or external partners. Cooperation
increases their chances of success, because
collusion cases are more difficult to detect,
as the perpetrators tend to be more creative
than those who work solo. But, they can be
exposed if organizations are diligent about
curbing fraud and embezzlement.
“Statistics show that companies that institute effective fraud policies experience a
material reduction in financial losses should
economic crimes occur,” says Frank
Suponcic, CPA, CFE, a principal with Skoda
Minotti.
Smart Business spoke with Suponcic to
learn more about how organizations can
reduce those losses, maximize their earnings
and save themselves embarrassment.
What measures can organizations take to
minimize their risks?
One of the most effective ways to minimize
risk is to review and test internal controls
continuously. Even though many executives
believe their companies’ internal controls
are adequate, that might not always be the
case. The material discrepancies between
what management thinks is in place versus
what employees are actually doing can be
significant. That explains why constantly
reviewing internal controls is a major deterrent to fraud and embezzlement.
Organizations can also educate their
employees and vendors about what is
expected of them regarding fraud and
implement a fraud hot line outside the company through which employees and vendors can report anonymously real or perceived fraudulent activity. This hot line can
be tied in with the American Institute of
Certified Fraud Examiners, local CPAs or
law firms; there are a multitude of sources.
The hot line should not be tied directly to
company sources, though, because the people receiving the fraud alerts might be
involved in the fraud.
Another step is to implement and enforce
fraud policies. A surprising number of organizations have such policies in place but do
not enforce them. Also, providing economic
incentives to employees to encourage them
to report fraud is helpful, as is the willingness to follow up on tips. Often managers
will dismiss tips as hearsay and find out after
they have been victimized that they were
accurate. That is too late to prevent their
losses. A clearly written fraud policy can
reduce the chances of that happening.
How does a fraud policy help?
The policy is a ‘thou shalt not steal’ document that allows companies to communicate with their employees on the reporting
procedures they should follow if they suspect that fraud is going on. Importantly, the
policy should be written and signed on an
annual basis by all employees, from the top
down. It sets the tone by specifying that
fraud will not be tolerated at any level of the
work force and lays out the consequences to
employees. All employees who sign the policy acknowledge that they have not perpetrated economic crimes and do not intend to
in the future. The signed document is a valuable tool should they commit such a crime
and fall back on an excuse like they were
only ‘borrowing’ the money, as unauthorized
‘borrowing’ is a fraudulent act.
What makes up an effective fraud policy?
The policy outlines specifically what constitutes fraud and explains what the consequences will be, e.g., perpetrators will be
prosecuted and, of course, terminated, and
the company will seek restitution. It should
include what activities are considered inappropriate and provide examples of fraud,
such as misappropriation of checks, paying
personal bills with company funds or using
company property without permission.
Ideally, it should be disseminated to outside
vendors and customers in light of the
increase in collusion cases that involve people outside the companies. That makes outsiders aware of the company’s firm position
on fraud and may lead to alerts from them
about the occurrence of internal fraud.
Is it costly to implement an effective fraud
policy?
No, and it’s money well spent. Some of the
anti-fraud recommendations have a dollar
tag associated with them. Others do not,
since they are nothing more than changes to
policies that are already in place. Setting up
a ‘whistle-blower’ program or a hot line is relatively inexpensive. There might be fees
associated with steps like changing where
customer deposits are sent. It might be
advisable for small business owners to have
their companies’ bank statements sent to
their houses. That way, they can personally
monitor every check or wire transfer to
make sure it is appropriate. About 85 percent of all fraud that occurs is done through
checkbooks and cash. So, simple mechanisms like reconciling every bank statement
or setting up a physical lockbox for cash can
deter fraud.
Overall, the costs associated with instituting an effective fraud policy depend on how
inclusive a company wishes to make it.
FRANK SUPONCIC, CPA, CFE, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or [email protected].
