Fraud and the Economy
Comments Off By, Robert H. Gould, CPA, CFE
Think the economic downturn has a minimal effect on business fraud??
Think your organization is exempt from fraud??
Think Again!!
According to the Association of Certified Fraud Examiners (ACFE)
2008 Report to the Nation On Occupational Fraud And Abuse, the two largest behavioral red flags present during a fraud scheme were living beyond one’s means (39%) and financial difficulties (34%). A closely related trait during tough economic times is excessive pressure to perform within an organization (7%). Ironically, these three behavioral traits fit neatly within the three prongs of the Fraud Triangle – pressure, opportunity and rationalization. This indicates a prescription for disaster. Clearly, with the current state of economic affairs and the outlook for tougher economic times, now is the time for business owners to assure that processes are in place to deter possible fraud. The alternative could be catastrophic to a business.
Here are some relevant facts presented in the (ACFE) 2008 Report to the Nation:
- • Approximately 48% of perpetrators had worked at the organization for five years or less.
• More than half of the fraud cases studied involved a fraudster over the age of 40.
• Over 40% of all frauds in the study were perpetrated by employees who earned less than $50,000 per year at the time of the fraud. (This seems to point to more motivation to engage in fraud due to intense financial pressure.)
• The majority of fraud cases were perpetrated by males. Over half of the criminals had attended or graduated from college. As the perpetrators education level rose, so did the median loss caused by the fraud scheme. The highest percentage of schemes involved those in the accounting department. Internal auditors were the least common perpetrators of fraud schemes.
• The effectiveness of background checks in preventing fraud is limited. The vast majority of employees who commit occupational fraud are first time offenders. In addition, there is evidence that employment background checks are ineffective at identifying potential fraudsters even when those persons have had previous employment-related issues involving fraud. Many employers are reluctant to share negative information about past employees for fear of potential legal liability.
• The study noted that credit checks were by far the least common form of background check performed by victim organizations. (As stated at the beginning of this article, living beyond one’s means and financial difficulties are two of the most common cited behavioral red flags.) It would seem advisable for organizations to devote more efforts to conducting credit background checks on new applicants.
• Lack of internal controls was the most commonly cited control weakness. A second contributing factor was overriding of controls in place. 75% of the victim organizations in the study altered their existing internal controls system in direct response to the discovery of the fraud which shows that most organizations perceived the fraud to have occurred or succeeded, at least in part, due to control weakness. As a response to the fraud, the most common change was to either implement or modify management’s review of the internal control system. Surprise audits were the second most commonly implemented or modified control mechanism.
• Tips were the most common detection method, generally followed by internal controls and internal audits. In privately held companies, frauds were detected by accident nearly a third of the time. Involving cases where tips were instrumental in the detection of the fraud, 31% were received via hotline or other formal reporting mechanism. The greatest percentage of tips came from employees of the victim organization.
While studies are important and give the relevant facts necessary to focus on alternative deterrent methodology, there is no replacement for a “Tone at the Top” attitude in any organization. The bullet points above provide valuable information to help build a framework around the areas of most concern within an organization. Management’s reaction to these concerns filter down to all employees who must carry out the organizations mission. Don’t make the mistake of thinking your organization or industry is exempt from fraud. Studies show there are no organizations exempt – including publicly traded companies, privately held companies, not-for-profit organizations, and governmental agencies – and no industries exempt – including insurance, banking, manufacturing, retail and the like.
So, what can you, as a business executive, do to deter fraud?
- a. Determine the most likely areas that fraud could occur in your business.
b. Analyze what controls are in place (or deficient) in the areas of concern.
c. Determine if the controls in place are being monitored by management.
d. Determine whether the results of monitoring are being properly communicated within your business.
e. Assure that deficiencies in controls are being corrected and instances of fraud are being reported.
f. Avoid crisis management.
Fraud comes in all shapes and sizes and a few of the more common types to be on the lookout for are as follows:
- a. Expense account/business credit card manipulation
b. Fictitious persons on the payroll
c. False invoices/overcharging
d. Inventory thefts
Click here for a Wilson Price 10-point fraud questionnaire. We encourage you to “take the test” and if your answers differ from ours, contact us with your concerns. All of our discussions with you are, of course, confidential.
We look forward to talking with you and are available to discuss how Wilson Price can be of assistance in devising a program to give you peace of mind. Fraud is a serious issue and, we believe, even more so in today’s tough economic environment.
Don’t be caught by surprise.
Think again!!
Contact Robert Gould for more information
Phone: (334) 260-2323
Themocracy