Polson Higgs
Fraud Happens
13th January 2010 | By Graham Crombie - CEO
Welcome back to 2010. I hope everybody has had a good break and is feeling positive about the year ahead. I have taken the opportunity to refresh and start thinking about the issues facing our clients and how we can help.
One issue we are starting to see come through is that of fraud in the workplace. Fraud always increases in a difficult economy. One of the articles I was reading was from a member of the Leading Edge Alliance, a group of firms we are involved with around the world. I have set out some of the key points below raised in the article below.
Let’s get it right out in front. Fraud happens!
It is a serious problem for all organizations, whether they are public companies, limited liability companies, partnerships, and even non-profits. Regardless of the line of business, the fact is that employees (and non-employees also) commit fraud.
Most fraud is ongoing. Once it starts, it does not stop by itself. And as it continues, it grows.
Very few thefts occur for the first time in large amounts. However, after the fraudster realises how easy it is to take $100, the next week it’s $200, then $500, etc. By the time it’s caught, each individual occurrence can be in the thousands of dollars or more. Most fraud is perpetrated by well-educated males in senior executive positions (61%). We also know that fraud is affected by conditions within the organization, beginning at the top, and filtering down.
Many business owners will contend that there are sufficient internal controls in place to deter, or even eliminate, fraudulent actions. But, as experience has shown, internal controls do not entirely prevent fraud. Also, last year’s internal controls may no longer be as effective as when they were developed. Businesses change, and as they do, more/different employees are hired for old and newly created positions. Rarely are internal controls considered in these circumstances.
Some statistics to ponder:
- Certified Fraud Examiners estimate the annual business fraud loss to be in the neighbourhood of $652 billion.
- The average loss in a small business is $190,000.
- The average loss in large companies is $97,000.
- In more than 37% of fraud cases discovered, the fraudster had been employed more than 10 years by the organization.
- Personal problems with debts, gambling and drugs were recognized in many of the situations uncovered by investigation.
- While some frauds involved theft of inventory or other tangible assets, cash was targeted in more than 90% of the schemes.
Fraud generally does not occur in a vacuum; many times it happens within an environment that, while maybe not overtly, is a breeding ground for this type of behaviour. Many of the frauds we have investigated were perpetrated in offices where the managers/owners were very busy with their daily routines and did not pay appropriate attention to areas which, when left unguarded, presented opportunity for loss of cash.
While some of the warning signs of fraud listed below may seem like common sense, they are meaningless unless someone is paying attention. Fraud in small businesses tends to be unsophisticated, and on the surface, begging to be discovered. When no one is looking, they go on for years sometimes before detection. Here are some common warning signs of fraud:
- An employee who is living beyond his/her means
- Sub-ledgers which do not reconcile with the general ledger
- Excessive write-offs of accounts receivable
- Unexplained cash discrepancies
- Complaints from customers about billing/amounts owed
- Complaints from vendors about payment
- Rise in “soft” costs (i.e. advertising, consulting, etc.)
- Voided, destroyed or missing cheques
- An employee who never takes a vacation
The above warning signs are not intended to alert the reader that a fraud is definitely taking place. Rather, the guidelines are simply indications that if any one or more of the events are exhibited, someone should take another look at the processes that allow these events to occur.
Common Methods of Fraud
Skimming
This type of fraud occurs when cash is taken out of the system prior to its recording. A typical example of this type of fraud is sales which are not rung into the register and find their way into the cashier’s pocket. Skimming can also take place when receipt records are falsified or bank deposits are tampered with.
Larceny
This type of fraud occurs after the cash has been recorded in the accounting system. Many larcenies are committed by bookkeepers, or others who have access to the bookkeeping/accounting records of the organization, and also to the cash/cheques received. Cheque tampering and fraudulent vendor schemes also fall into this class.
Expense Account Schemes
We generally see four different methods for misappropriation of funds when dealing with expense accounts. First, it is not unusual for legitimate receipts to be submitted, although they are for non-business expenses (dinner with a friend).
Second, it is not unusual for a fraudster to inflate expenses where receipts are not expected to be required, i.e. taxi receipts, or to alter the receipts prior to submission for reimbursement.
Next, fictitious expenses can be sometimes found on expense reports. In this case, a false receipt or other proof of the expense is presented. It is very easy to create a receipt for an expenditure that never occurred.
Also, multiple submissions for the same expense is not an uncommon method of fraud against an employer. In this method, an expense, possibly an airline ticket and hotel bill, are resubmitted two or three months after the original submission. Since many employees travel several times per month, the submission is not unusual, and only a keen memory will be able to ferret out this scheme.
Fraud is an ever-present threat to every organization’s balance sheet, and even its continued existence. However, not enough companies pay the appropriate amount of attention to this peril. While recognizing it’s impossible to provide any assurance that the information contained in this article will prevent fraud in your company, here are a few tips to help you prevent fraud in your organization:
- Develop a written code of ethics
- Lead by example
- Establish reasonable expectations of all employees
- Treat employees well
- Restrict access to bank accounts
- Make sure bank reconciliations are performed regularly
- Secure inventory and supplies
- Provide a mechanism for reporting fraud
Polson Higgs has qualified staff who can assist in reviewing any issues you may have and developing an appropriate framework for your organisation.
Feel free to contact me at graham.crombie@ph.co.nz
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