Occupational fraud, as defined by the Association of Certified Fraud Examiners (ACFE) in its 2004 study, is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”  For the past several years fraud has become the hot topic in the business and financial world.  The number of reported cases and losses continue to grow.  One may believe fraud does not affect their particular company or specific industry. However, take a look at some statistics resulting from ACFE’s survey.  The most cost-effective way not to become a victim is to prevent or mitigate the fraud from occurring in the first place.

ACFE’s 2004 report to the nation was based on 508 cases of occupational fraud that were reported by Certified Fraud Examiners.  The types of organizations studied included privately-held companies, public companies, not-for-profit organizations, and government agencies.  The industries covered varied greatly from manufacturing to banking to construction to retail, to others.  Of the 508 cases studied, 487 were able to identify the specific losses suffered by the organizations. Small businesses, as defined in the study, represent organizations with fewer than 100 employees.  Below are a few samples of the findings from ACFE’s 2004 report.

• 46% of the cases were small businesses; the median losses reported in the small businesses were $98,000.  Only companies with greater than 10,000 employees had median losses higher than small businesses.
• Privately-held companies reported the largest median losses at $123,000.
• Of the three types of frauds classified in the report, which are corruption, misappropriation of assets, and fraudulent financial statements, misappropriation of assets was prevalent in over 90% of the cases; however, these schemes reported the lowest median losses of the three.
• The most frequently targeted asset in cases of misappropriation was cash.
• The study estimated that the typical U.S. company loses 6% of its annual revenue to fraud.  To put that into perspective, if a company produces $1,000,000 in annual revenue, the bottom line loss to fraud is $60,000.
• Only 12% of the fraudsters in the study had previous convictions or fraud-related offenses.
• The median recovery among the victims in the study was only 20%.  Close to 40% recovered nothing.

The most cost-effective way to reduce the likelihood of becoming a victim of fraud is fraud prevention.  To identify the most effective prevention techniques to implement in a particular business, analysis should first be performed on the current conditions of the company and the significant fraud risks to which the company may be exposed.  Here are several mitigation techniques that can be implemented to prevent fraud:

Ø      Developing a code of conduct which “sets the tone from the top”

Ø      Communication of ethical behavior from owners or senior management

Ø      Education and training

Ø      Mandatory vacations

Ø      According to ACFE’s study, frauds were most likely to be detected through tips. Of the frauds perpetrated by owners or key management, which tend to be most costly, over half were identified through tips.

Ø      After identification of the areas posing the greatest risks to fraud, design and implementation of effective controls to mitigate fraud can be put into place.

Ø      Technology improvements can reduce the amount of manual controls.

Ø      Performing audits internally or by hiring independent auditors can deter perpetrators from committing fraud against the organization.

Ø      Actions taken by the company, such as termination of and/or prosecution, against the perpetrator upon detecting fraud can deter perpetrators from committing future fraudulent acts against the organization.

Is your company losing 6% of its annual revenues to fraudsters from within your own organization?  Can companies, small businesses in particular, afford the risks of future operation by not implementing prevention techniques because they have “con”fidence and trust in their employees?

SS&C Business and Tax Services, Inc. offers services and has experienced staff to assist you with the analysis needed to identify fraud risk areas in your business and to assist you with the design and implementation of fraud prevention techniques.