Fraud simply defined is a deception made for personal gain. Occupational fraud specifically, is the use of one’s occupation or position for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. It includes embezzlement, the act of dishonestly appropriating goods, usually money, by one to whom they have been entrusted.
In its 2010 report, the Association of Certified Fraud Examiners (ACFE) stated that small organizations are disproportionately victimized by occupational fraud. Small organizations (those with fewer than 100 employees) suffered the greatest percentage of the frauds in the 2010 study, accounting for more than 30% of the victim organizations. The situation is aggravated by the fact that these are the very organizations that can hardly afford the loss.
The cost to small business extends beyond the loss of money to include: the distraction to the business, its employees, owners and others involved with the business. Lost productivity reflected in the cost to replace a once trusted and valued employee, as well as the recruitment and training of new personnel is an additional cost. In many cases, the cost of aggregating information to provide to authorities for prosecution escalates this further. Due to their limited capital, and the fact that many small businesses do not carry employee theft insurance, the impact of fraud is more severe.
Small businesses are particularly vulnerable because, in most cases, they have far fewer controls in place to protect their resources from fraud and abuse. They often employ friends, family members, and ‘trusted individuals’ who are subsequently entrusted with more responsibility and greater authority because the financial resources do not exist to spread the responsibility and authority by hiring more people. Essentially, small businesses are not large enough to provide adequate division of duties and a system of checks and balances; the classic "lack of segregation of duties" situation which is critical to internal control.
The scope of fraud often includes asset misappropriation. This involves the theft or misuse of organization’s assets, where the perpetrator wrongfully uses their influence in a business transaction to procure fraudulent statements and benefit for themselves. Other more frequent types of fraud include: falsification of expense claims, (i.e claims made for expenses never incurred); stealing money from the company’s bank account; falsifying supplier invoices possibly through collusion with supplier; theft of stock and raw materials. Others are transactions not conducted at 'arms length' where the purchaser bribes the salesman in return for a favorable contract and personal gain; fictitious invoicing (i. e. arranging for invoices for services never delivered) from connected parties to be passed for payment; acquisition of company property at less than market value which is then resold at a higher price.
Given the high costs of occupational fraud, effective fraud prevention measures are critical.
Personal policies that help prevent fraud should be implemented. At hiring, a background check is of utmost importance as many perpetrators are often repeat offenders. Creating a work culture that values honesty and integrity with a zero tolerance for fraud by prosecuting offenders is essential. It will also serve the small business well to educate employees to be on the alert for fraud as well as put in place an effective fraud reporting system that protects the whistle blower. A study by the ACFE shows that tips resulted in discovering fraud more often than any other source. Additionally, employees who handle certain high risk financial assets should be bonded.
Audits are an essential tool in fraud detection and prevention. Surprise audits have proved especially effective in fraud detection. Such audits should be unannounced. Periodic audits should also be carried out. Interim audits should include inventory audits. Having a CPA conduct periodic reviews of the company's internal controls is good practice.
Accounting controls are another important aspect of safeguarding against fraud. Monitoring of the financial statements and management reports can provide clues to the possibility of fraud. Variances in account metrics and analysis, could well be a pointer to fraud
In addition strong anti-fraud controls should be established and monitored to see that they are operating effectively. These should include: proper separation of duties, use of authorizations, personnel job rotations and mandatory vacations, physical safeguards of assets. Video surveillance systems can be very effective in detecting and preventing theft and fraud. The business should provide specific instructions to its bankers on policies surrounding disbursement of cash.
However, as no system of controls is so perfect that theft cannot occur, carrying adequate employee theft insurance is an economical way to mitigate the effects of losses.
In conclusion, while it may not be possible to completely eliminate fraud, an effort to prevent it should be vigorously pursued.
Sources
http://www.gaebler.com/Small-Business-Fraud.htm
http://www.acfe.com/resources/view.asp?ArticleID=430
http://www.acfe.com/rttn/2010-conclusions.asp
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