5 Ways to Protect Yourself from Fraud

A single case of fraud can be devastating to any organization regardless of size or corporate model. Most frauds go undetected for a number of years—the average being 18 months before detection—which results in a greater impact to your organization with often far reaching and lasting effects.

According to the 2014 Report to Nations produced by the Association of Certified Fraud Examiners (ACFE):

• A typical organization loses 5% of its annual revenues to fraud, which equates to approximately $3.7 trillion when applied to the 2013 Gross World Product
• A single case of fraud has a median loss of $145,000 while 22% of all cases had loses of at least $1 million
• 28% of all fraud occurs in small businesses

Mind you, these amounts include all types of fraud—check scams, payroll schemes, theft of physical assets or cash, and even financial statement fraud. However, the ACFE identifies financial statements as being the area with the highest level of risk. Such fraud encompasses 9% of all fraudulent activity with a median loss of $1,000,000 per instance! The ACFE also notes that small businesses are disproportionately victims of fraud and, most notably, under-protected.

So, what steps can you take within your organization to limit your exposure to fraud or help detect it? Below are five recommendations for how to protect yourself based on ACFE insight and my professional experience.

     1.  Provide anti-fraud training to employees.
     2.  Create an anti-fraud policy with zero tolerance for offenders.
     3.  Establish an anonymous tip hotline or tip submission process.
               -  Over 40% of all cases were detected by a tip. This is more than twice the rate of any other detection method!
     4.  Ensure management conducts thorough and consistent reviews of financial data.
               -  Dig deep into the numbers and gain a clear understanding of every line item.
               -  Use trend and variance analysis to identify anomalies then seek backup and supporting documentation for these items.
     5.  Establish internal controls and reasses their effectiveness periodically.

This final point bears repeating—establish internal controls and reassess their effectiveness periodically. Segregation of duties and oversight/review processes are two relatively easy controls to implement that can offer significant returns in terms of fraud protection. Segregation of duties limits the ability of one person in the organization from having complete control over the process. For instance, the individual who enters invoices and writes checks should not also be able to sign checks.

Regarding oversight/review process, some straightforward options to consider include:

• Require all check signers to actively review supporting documentation prior to signing the check
• Dual signatures on all checks over a certain amount
• Involve 1-2 additional resources outside of the financial administration team in limited day-to-day duties like paying bills or entering customer receipts
• A separate resource should create customer invoices, receive the mail, and document any checks prior to submission to the financial team for reconciliation. This check log could then be matched to bank deposits and statements periodically.

I know what you’re thinking: “The above considerations are great, Tami, if I have sufficient staff to support it.” This concern is valid; however, there are solutions available at all price points. Look into project-based CPA firms, bookkeepers, or management providers. Review business or credentialing associations for recommended independent consultants or consulting firms (I’ve included below links to a few associations to help with this effort). Any of these solutions can help design and implement internal control policies to fit your specific needs and budget.

There are any number of options available to help businesses of all sizes with fraud protection, including some simple steps you can implement immediately to help protect yourself and your organization. I encourage you to familiarize yourself with these options, and roll out a plan for your business today. You know what they say—an ounce of prevention is worth a pound of cure.

Resources
ACFE 2014 Report to Nations
Certified Bookkeepers
CPA Firms (check your state's public accounting society)
     Oregon
     Washington
     California
Association Management

About the Author 

As Director of VTM Group’s Financial Administration, Tami Bringman is responsible for managing financial reporting for over thirty industry organizations. She works with her clients to deliver tailored financial reports that meet each Board’s needs while adhering to GAAP regulations. Tami leads a team that provides services including full-cycle bookkeeping; budgeting and forecast creation management; financial policy and procedure creation and compliance; and tax and audit support.

Tami can be reached at tbringman@vtmgroup.com or connect with her on LinkedIn.