| Everyone has some "Bernie Madoff" in them. It is | | | | detected will be reported to the police for further |
| said that for the "right price", many people might | | | | investigation and where applicable, the company |
| compromise their values. Fortunately, the vast | | | | will prosecute the offender. |
| majority of us have high moral and ethical | | | | 3. All employees MUST take their vacation time. |
| standards so fraud is not even a consideration. | | | | In many cases, fraud will be detected by |
| For those very few who have a feeling of | | | | someone else performing the duties of the |
| entitlement, how do we protect ourselves from | | | | individual perpetrating the fraud. Therefore, |
| them? | | | | employees who are hesitant and/or resistant to |
| Occupational fraud comes in a variety of types | | | | take their vacations should be watched very |
| and forms. It can be perpetrated by many | | | | carefully. |
| individuals within an organization. The term | | | | 4. Rotate job responsibilities. Once again, fraud |
| "occupational fraud" may be defined as: "The use | | | | becomes more difficult if the perpetrator does |
| of one's occupation for personal enrichment | | | | not have constant and sole access to certain data |
| through the deliberate misuse or misapplication of | | | | and processes. |
| the employing organization's resources or assets." | | | | 5. Develop stronger internal controls which include |
| According to a study published by the ACFE | | | | proper segregation of duties. Since many small |
| (Association of Certified Fraud Examiners) in 2008: | | | | businesses have limited staff, it becomes |
| - Occupational fraud schemes tend to be | | | | increasingly difficult to define strong controls. For |
| extremely costly. The median loss caused by | | | | this reason, the ACFE report stated that only |
| occupational frauds in this study was $175,000. | | | | 16% of fraud was discovered through the |
| More than one-quarter of the frauds involved | | | | company's internal controls. Many small business |
| losses of at least $1 million. | | | | owners delegate too much authority to their |
| - Occupational fraud schemes frequently continue | | | | bookkeepers and/or controllers. Beware of |
| for years before they are detected. The typical | | | | weaknesses in your systems and implement the |
| fraud in the study lasted two years from the | | | | following controls:a. The owner (or someone else |
| time it began until the time it was caught by the | | | | within the organization) MUST continue to review |
| victim organization. | | | | key financial reports and records. All |
| - Lack of adequate internal controls was most | | | | disbursements should have vendor invoices |
| commonly cited as the factor that allowed fraud | | | | attached to the check stub with the manager |
| to occur. | | | | supervisor responsible for the expenditure |
| - Small businesses are especially vulnerable to | | | | approving it before payment.b. The person who |
| occupational fraud. The median loss suffered by | | | | signs the checks should NOT be the one who |
| organizations with fewer than 100 employees was | | | | performs bank reconciliations. Detailed bank |
| $200,000. This was higher than the median loss in | | | | reconciliations should be reviewed and initialed by |
| any other category, including the largest | | | | either the owner or an outside accountant who is |
| organizations. | | | | familiar with the process.c. The person responsible |
| - Occupational frauds were most often | | | | for billing needs to get an approval from someone |
| committed by the accounting department (29%) | | | | outside of the accounting area in order to process |
| or upper management (18%). | | | | credits to customers.d. All suppliers added to the |
| It should be noted that many cases of fraud go | | | | system need to have an approval by the |
| undetected, and those that are identified, may not | | | | manager requesting the product/services, in |
| be reported to the police or the extent of the | | | | addition to that of the bookkeeper or controller. If |
| loss may not be fully discovered. | | | | the bookkeeper or controller is the one adding the |
| While it's impossible to detect 100% of fraud | | | | supplier, the owner needs to approve it.e. A |
| because collusion can bypass normal company | | | | report of additions and deletions of customers |
| controls, it is much less expensive to implement | | | | and suppliers should be reviewed and approved |
| sound internal policies and controls than it is to | | | | regularly by someone outside the accounting |
| investigate and prosecute. According to the ACFE | | | | area.f. Accounting systems should have security |
| 2008 report, fraud was discovered in small | | | | permissions prohibiting accounting personnel from |
| businesses 42% of the time through tips | | | | making certain changes to financial data. |
| (employees, customers, suppliers, etc) and 29% | | | | 6. Before hiring new employees, perform |
| by accident. Only 16% of the time was the fraud | | | | background and credit checks. Many companies |
| discovered through the company's internal | | | | will perform a background check on key |
| controls. The study also found that the median | | | | employees. However, 87% of the cases reflected |
| duration was 24 months with 52% of the | | | | the perpetrator had no previous criminal record. |
| perpetrators being with the company for over 5 | | | | The #1 reason for occupational fraud in small |
| years. | | | | businesses was due to financial pressures of the |
| So what steps can a small business owner take | | | | perpetrator. Therefore, credit checks can be a |
| to minimize the frequency and magnitude of | | | | stronger indicator than the background check. |
| fraud? Here are some key tips: | | | | 7. Be aware of employees living beyond their |
| 1. Develop a formalized mechanism for fraud to | | | | means or expressing personal financial difficulties. |
| be reported. A fraud hotline needs to be | | | | In 77% of the occurrences discovered and |
| implemented and its purpose actively | | | | reported to the ACFE in their 2008 survey, |
| communicated to all employees. There should also | | | | individuals living beyond their means (41%) and |
| be a procedure where specific managers are | | | | personal financial difficulties (36%) were the key |
| identified as confidential contacts, enabling | | | | reasons fraud was perpetrated by employees of |
| employees to report their concerns or suspicions. | | | | small businesses. |
| This procedure needs to be documented in writing | | | | When it comes to fraud and the controls to deter |
| and should require that more than one manager | | | | and detect it, don't bury your head in the sand. |
| investigates the allegation. | | | | Take control and derail fraud before it rears its |
| 2. Educate employees as to what constitutes | | | | ugly head. It can happen to you. Can your |
| fraud and the cost to the company. While this | | | | company afford to lose $150,000 (or more)? |
| sounds like common sense, it highlights to the | | | | If you don't have expertise in this area, bring in a |
| employees the need to be observant and their | | | | professional to take a look at your systems and |
| responsibility to report their suspicions. Make it | | | | controls. The investment will probably be the best |
| very clear to the employees that ALL fraud | | | | return your business will ever see. |