10 Signs Your Company May Be Harboring Fraudsters

Would you be able to spot a fraudster if you saw one? In our latest installment of Kaufman, Rossin Presents, forensics specialist Craig Hirsch, CPA, CFE, CAMS, taught business owners how to identify fraud and protect their organizations from fraudulent financial statements, theft and corruption.

Hirsch, a forensic and regulatory compliance service manager at Kaufman, Rossin, shared best practices and key findings from his team and from the Association of Certified Fraud Examiners’ (ACFE) Report to the Nations.

According to the report, in 2012 the median loss from fraud for small companies (i.e., less than 100 employees) was $147,000, which was comparable to larger companies. Consider the following median losses by size of the victim organization:

• 100-999 employees ($150,000)
• 1,000-9,999 employees ($100,000)
• 10,000+ employees ($140,0000)

For smaller companies, a loss of $147,000 can have a much stronger impact than for the larger companies because of their limited size, resources, and reserves. This can be a vicious cycle for small businesses, which are particularly vulnerable to fraud because limited resources often mean fewer and less-effective anti-fraud controls.

With proper anti-fraud training, small business owners, CFOs, and controllers can learn to detect potential malfeasance by looking for various types of symptoms. Those 10 signs of possible fraud may include, but are not limited to:

• Accounting/document symptoms
• Analytical anomalies
• Excessive lifestyle patterns
• Unusual behaviors
• Weak internal controls
• Tips and complaints
• Deficient tone at the top
• Unusually close relationships
• Insufficient fraud deterrence at the company
• Intangible “gut feeling”

It’s important to note that any one of these symptoms in a vacuum does not necessarily indicate a fraud. However, when there are multiple symptoms present, a small business owner should consider performing a “deeper dive” to determine whether or not a reasonable explanation exists.

It is statistically proven that certain anti-fraud controls directly correlate with decreases in both the cost and duration of fraud. For example, according to the ACFE, the cost of fraud is reduced by approximately 36-45% when certain controls are in place, such as management review, employee support programs, hotlines, and fraud training for managers/executives.

The duration of fraud is reduced by approximately 53-62% when other controls are implemented, such as job rotation/mandatory vacation, rewards for whistleblowers, surprise audits, and having an official code of conduct.

Small business owners need to understand the importance of anti-fraud controls, Hirsch says, and specifically those that have statistically and historically shown the correlation between their implementation and a decrease in fraud. Many of these controls can be implemented with minimal cost and limited resources, yielding potentially high values – in dollars, reputation, and operational elements – for the organization. There is no “one-size-fits-all” when it comes to anti-fraud controls, but each organization should consider reviewing its operations for fraud risks and establishing specific and tailored anti-fraud controls.

To learn more, contact Craig Hirsch at chirsch@kaufmanrossin.com.