Six Tips for Avoiding Fraud

As a business leader you play many roles to produce successful and profitable results. Keeping up with your own responsibilities is stressful enough and very time consuming. The last thing you have time to focus on is whether your employees are stealing from you or your business.

Yet fraud occurs more often than you’d imagine and could cripple your company.  According to a 2008 study conducted by the Association of Certified Fraud Examiners (AFCE) the average loss for U.S. companies was $1780 or about seven percent of their annual revenues. This has increased from the 2006 study where the average loss was five percent.

Regardless of how trustworthy your employees may appear you should know that no matter who you are fraud can happen. Whether you own your own small business or manage a department in a Fortune 500 company fraud happens everywhere and is very costly. In a quarter of the cases in the study in which over 950 businesses participated the losses totaled over $1 million.

Relatively speaking fraud in small businesses is a bigger problem than in larger companies. According the ACFE “The median [fraud] loss suffered by organizations with fewer than 100 employees was $200000 per scheme…higher than the median loss in even the largest organizations.” [1] This may be because large companies have stronger controls or at least the appearance of controls that may deter fraud.

Unfortunately unanticipated situations in your employees’ lives might lead to the temptation of fraud if your company isn’t well prepared. High medical bills out-of-control student loans rising mortgage rates and addiction are just a few of the problems that can push a trusted individual over the edge.  It can be difficult to keep up with their personal lives and isn’t very realistic to expect to do so. The most you can do is look for signs of depression or excess stress. From there you can at least be aware and take extra precautions.

There are many different ways to commit fraud which is part of why it can be tough to discover initially. New methods evolve over time and techniques change so it is important to educate yourself. According to the ACFE there are four elements of fraud.
1.      Fraud is clandestine and deceptive.
2.      It violates the perpetrator’s fiduciary duties to the victim organization.
3.      It is committed for the purpose of direct or indirect financial benefit for the perpetrator.
4.      Fraud costs the employing organization assets time revenue reserves or a combination of them all.

Due to its secretive and subtle nature fraud doesn’t just happen in an instant. According to the ACFE the typical fraud case goes on for 18 months before finally being detected. After 18 months of a particular fraud scheme you have to look beyond just the monetary losses and consider the possible damage done to your books. Your accounting may have been completely altered and the repairs may take a while. It will take more money and the valuable time of other employees to try to get your books accurate again. You also may never discover every aspect of the scheme.

There is no single way to commit fraud. It is a very complex and evolving problem because there are many ways to conduct a scam. All fraud cases however fit into three classifications that each have unique characteristics. The following chart (from the ACFE report) highlights them:

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