A 2014 Global Fraud Study conducted by the Association of Certified Fraud Examiners (ACFE) estimates that the average business loses five percent of their revenues to fraud. The global total of fraud losses is $3.7 trillion. The median fraud case goes 18 months before detection and results in a $145,000 loss. How can you avoid being a fraud victim?
The Fraud Triangle
The first step is to become more aware of the conditions that make fraud possible. The fraud triangle is a model that describes three components that need to be present in order for fraud to occur.
Motivation (or Need)
When fewer than three legs of the triangle are present, we can deter fraud. When all three are present, fraud could occur.
Financial pressure at home is an example of motivation to commit fraud. The fraud perpetrator finds him or herself in need of significant cash due to any number of reasons: poor investments, gambling, an extravagant lifestyle, health care costs, family requirements or social pressure. In short, the person needs money, and fast.
Those who commit fraud may rationalize the act in their mind:
I’m too smart to get caught.
I’ll put it back when my luck changes.
The big company won’t miss it.
I don’t like the person I’m stealing from.
I’m entitled to the money.
At some point in the process, the person who commits fraud may lose their sense of right and wrong or their fear of consequences. In many cases, they may intend to replace the money but never have the funds available to do so.
Here’s where you as a business owner have to be aware of your company’s operations. If there’s a leak in your control processes, then you have created an opportunity for fraud to occur. People who handle cash, have signing authority on a bank account, or maintain financial records with poor oversight could notice that there is an opportunity for fraud to occur with the ability to cover up the act for some time.
Seventy-seven percent of all frauds occur in one of these departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance. The banking and financial services, government and public administration, and manufacturing industries are at the highest risk for fraud cases. (Source: ACFE)
Once you understand about fraud, prevention is the next step. To some degree, all three points on the triangle can be controlled; however, fraud prevention programs typically focus on the third area: Opportunity.
Internal control measures such as the following can be put in place to minimize fraud risk:
Segregation of duties – by splitting the functions of, for example, receiving cash receipts, preparing bank deposits and posting customer payments, a single staff member would have less opportunity to misappropriate funds.
Owner/officer review of the bank statement – this simple control gives, at the very least, the illusion that someone is reviewing the cancelled checks for proper authorization and signature.
Written policies and procedures - these should document how job functions are to be carried out, leaving little room for deviation. Following up and monitoring these procedures is a necessary part of maintaining control over each function.
Budgeting and regular financial reporting – are you, as a business owner/officer, involved with all aspects of the business? While you may trust your individual unit managers explicitly, th