If you could prevent losing $160,000 per year, would you be willing to invest the time, money and effort to do so? More and more, businesses are falling victim to fraudulent schemes and a recent report issued by the Association of Certified Fraud Examiners shows that the costs can be high, especially to smaller organizations where fraud can go undetected for months, even years. However, the study also reveals that there are some ways to considerably lower your risk through preparation.
Fraud Statistics
A recent study shows that fraud prevention is often overlooked and considered only after fraud has already been detected. A 2010 report issued by Association of Certified Fraud Examiners, The Report to the Nations on Occupational Fraud and Abuse, shows that frauds lasted, on average, 18 months before detection. Occupational frauds are much more likely to be detected by a tip than by any other means, indicating that businesses are largely unaware they are the victims of fraud before it is too late.
The ACFE survey revealed eight controls that Certified Fraud Examiners (CFE’s) feel are important to detecting or limiting fraud. Of these controls, an external audit of the financial statements was discovered as the least important, yet in 88% of the cases in the survey, this was the control most commonly used by the victim organizations. The purpose of a financial statement audit is not to detect fraud.
The report also shows that a typical organization loses 5% of its annual revenue to fraud every year, with the median loss being reported at $160,000; and nearly one quarter of all organizations studied, lost at least $1 million. The study showed that small businesses are disproportionately victimized by occupational fraud. Small businesses can be especially susceptible due to a lack of anti-fraud controls which are required in their publicly traded counterparts. Trust is essential in any small business environment, but it shouldn’t be the only control for fraud prevention.
What Businesses can do
There are a number of things that businesses can do to become better prepared for combatting fraud. A fraud hotline is one of the most inexpensive controls to put in place and it offers anonymity and confidentiality. Considering the potential cost to your organization if/when fraud is detected, it is more cost efficient to have a fraud prevention system in place.
Employee education can be an effective weapon for preventing and detecting fraud. The study showed that most frauds are detected by tips which is why it is essential that employees be trained to spot any questionable activity. Organizations that have anti-fraud training for employees lose less to fraud than those organizations without fraud detection training.
Surprise Audits, though retroactive in nature, can also be a useful tool for combating fraud. Surprise audits are rarely used in most organizations, but they can be useful in detecting fraud. More importantly, surprise audits create a perception of detection, deterring potential perpetrators out of fear of getting caught.
Look out for behavioral warning signs. The study showed that most fraud perpetrators often exhibited common tell tale signs (i.e. living above their means or exhibiting control issues). Employees should be trained to spot certain red flags because they might be the key to detecting and deterring a fraud.
How MCM Can Help
We encourage companies to think about controls they currently have in place and consider if they are the most effective controls to limit that risk for fraud. It is important for any business to implement a proactive approach to fraud prevention.
MCM has three CFE’s on staff that are well equipped to perform a variety of risk management services, including:
- Risk analysis to determine company vulnerability for fraud
- Evaluation of current controls for effectiveness
- Aide in implementation of effective controls for the fraud prevention
Let us help you limit your risk for fraud. Contact Amy Gumlaw, CPA, CFE or Drew Chambers, CPA, CFE today!
Mountjoy Chilton Medley LLP offers expertise in audit and assurance services, tax planning, business valuation, litigation support, fraud examination, business start-up and consulting for non-profit, public and privately-held organizations. The firm offers further guidance in healthcare business consulting, payroll and bookkeeping services and wealth management services. The company has offices in Louisville, Lexington, Covington, Frankfort and Bowling Green. www.mcmcpa.com.
