Fraud, What's It Costing Your Business?
$994 billion!!! No, it is not the cost of a new stimulus plan, more TARP, another government health care plan. It is the estimated amount that U.S. organizations lost to occupational fraud in 2008.
The Association of Certified Fraud Examiners recently issued its report - Report to the Nation on Occupational Fraud and Abuse. The report was conducted by compiling data from 959 cases of occupational fraud between January, 2006 and February, 2008. It was Certified Fraud Examiners who provided data for the study. As you will see from the highlights below, fraud is a costly matter for all businesses regardless of size. Small businesses are as susceptible to it as large organizations and the private sector as susceptible as the public sector.
Because fraud is so costly, it's important to implement controls, processes and procedures for detecting fraud or potential fraud before it occurs. One of the best models you can follow is the IRS model - compliance through fear. Most taxpayers are not enthused about paying taxes and filing their returns each year, but they do so because it's the law! Most tax payers are fearful of the IRS and the consequences of not complying with the tax laws. If someone knows that their work will be reviewed, and there are procedures in place to detect fraud, it is much more likely that an individual will not attempt fraud.
Some common tips for preventing fraud are surprise audits, having a second person review work, having a follow behind to double check the bookkeeping and preparing financial statements, calling vendors to check on orders and verify they are real orders, and reconciling invoices to payments.
Here are some quick highlights of the Report To the Nation on Occupational Fraud and Abuse:
- Median loss by fraud - $175,000
- 25% of the frauds committed cost organizations more than $1 million
- Typical time frame for a fraud is 2 years
- Often times, the fraudster is a first time offender
- Most frequent way to catch frauds was through tips - 46% of cases were uncovered based on tips from employees, customers and vendors
- Anti-fraud controls did help reduce or catch fraudulent schemes. Organizations that conducted surprise audits had a median loss of $70,000 compared to $207,000 for those that did not have a plan in place.
- Most common industries victimized by fraud: banking and financial services - 15% of cases; government - 12% of cases; health care - 8% of cases
- Small businesses are not immune to fraud: Median loss for businesses with fewer than 100 employees - $200,000.
- inadequate internal controls are most common reasons that permitted fraud to occur.
- most organizations closed the barn door after the horses escaped. Anti-fraud controls were implemented by 78% of the organizations after they discovered the fraud.
- Most frequent perpetrators of fraud were upper management and accounting departments. Median loss for fraud committed by upper management was $853,000.