What small businesses can do to prevent and detect occupational fraud

All things change, yet all things remain the same. The Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse (“ACFE Report”) is consistent with the organization’s prior studies, as to which entities are most likely to be victimized by fraud and measures that can be taken to effectively deter and detect fraud.
Businesses continue to be plagued with “occupational fraud,” the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
“Occupational fraud can be classified into three broad categories: asset misappropriations, corruption and financial statement fraud,” according to Natasha Perssico, forensic accountant, and James Schultz, Principal, at Cendrowski Corporate Advisors LLC.
Smart Business spoke with Perssico and Schultz regarding the issues of fraud and steps that small businesses can take to reduce fraud.
How common is the occurrence of fraud in small businesses, and what impact can it have?
Small businesses having fewer than 100 employees are more frequently victimized by instances of occupational fraud, accounting for nearly 30 percent of fraud cases reported. The risk to small business as targets of fraud is compounded by the fact that many small business owners think they cannot afford to invest in fraud prevention and detection policies and procedures. In actuality, small businesses cannot afford to not implement fraud prevention and detection procedures. However, median losses for small businesses and large entities are quite close in dollar amount — $154,000 and $160,000 respectively. While a larger organization might be able to absorb losses and recover from a financial blow of this magnitude, a smaller business might not be able to recover.
What steps can be taken by small businesses to prevent fraud?
Small businesses owners will be relieved to know that there are many simple, effective and affordable practices that could be implemented by small business. Here are some key steps for owners to employ to minimize acts of fraud:

  1. Segregation of Duties. Many small businesses rely on one person to open mail, process payments, make bank deposits, pay invoices, handle petty cash and reconcile bank statements. Such unchecked access creates an opportunity for fraud and misappropriation of assets. Segregating accounting responsibilities so that no single individual controls all of the financial activity and reporting of that financial activity reduces the risk of fraud.
  2. Insist on receiving and reviewing bank statements first. You should have the original or a duplicate bank statement sent to your home address or a secure P.O. Box directly from the bank. Make it a regular habit to review bank statements for missing checks, checks that are out of order, checks written to unfamiliar suppliers or other unknown persons and checks made out to a third party but endorsed by someone in your company. Informing your employees that you review the bank statements independently of accounting personnel will also serve as a fraud deterrent.
  3. Review accounts receivables, cash receipts, and uncollectible accounts. Understanding trends and investigating changes in accounts receivables and cash receipts is a useful practice. Unexplained declines in cash receipts and increases in uncollectible accounts write offs could be a flag that misappropriation of cash is occurring before bank deposits. Sending customers account statements is a good procedure that can possibly reveal any discrepancies as customers will complain if the amounts said to be owed by them are erroneously overstated. Write-offs of uncollectible accounts should also require approvals.
  4. Educate employees about what behaviors are unacceptable and how to report suspicions of fraud. Employee tips play an important role in fraud detection. Employees should be informed that fraud is unacceptable, how fraud can negatively impact the organization, and how it can negatively impact the employees personally.

What are some positive results of implementing a fraud prevention program, and who can help in creating a good program?
For small businesses even simple procedures can make a large impact on the company’s image and financial health. Organizations with strong and frequently communicated fraud deterrence policies are better situated for early fraud detection and the mitigation of large losses due to long running frauds. Further, holding other operational issues aside, organizations with strong anti-fraud programs also benefit from a less risky image leading to greater shareholder, creditor, and employee confidence in the organization.
Organizations unfamiliar with fraud prevention and fraud risk assessment programs should rely upon qualified fraud experts in conducting and implementing these important processes.
Insights Accounting is brought to you by Cendrowski Corporate Advisors.