Fraud

By Jenny Smith, CPA

Fraud is something many of us don’t like to think about in our company, but the truth is it has a big impact on companies in all industries. According to the Association of Certified Fraud Examiners 2018 Report to the Nations, the transportation and warehousing industry had 83 reported cases of fraud in 2018 with each case having a median loss of $140,000. Unfortunately, many cases go undetected and unreported. In addition, it can be difficult to determine the full amount of loss from a fraud case. The good news is business leaders who understand how much can be at stake can design controls and use tools to prevent and detect fraud.

The Association of Certified Fraud Examiners 2018 Report to the Nations: Global Study on Occupational Fraud and Abuse cites some staggering statistics regarding fraud.

• Companies with less than 100 employees represent 28% of fraud cases and median losses are $200,000.
• Private companies represent 42% of fraud cases and median losses are $164,000.
• Long-term employees stole twice as much as short-term employees.
• 53% of victims in fraud cases recovered nothing.

With the number of cases being significant and losses being substantial in small businesses, all business owners and managers should be taking steps to prevent fraud in their business.

Businesses with less than 100 employees also face different risks for fraud to occur in their organization.

Corruption is the most common in small businesses. 70% of corruption cases are perpetrated by someone in a position of authority and 50% of the cases were detected by a tip. A code of conduct displaying an ethical tone at the top and a whistleblower hotline can be key detection methods in a corruption case.

The other risks related to small business can be tied back to how strong the internal controls of the organization are. The internal controls are the checks and balances implemented within the organizational processes that ensure no one has the complete control of a process. In small organizations, this can be difficult due to a limited number of staff. Often the owner or key manager is needed to provide adequate segregation of duties. Internal control weaknesses are responsible for nearly half of all frauds and the lack of internal controls is the primary control weakness that contributes to occupational fraud. In small businesses, it is very important for the owner or key manager to be reviewing monthly financial statements and bank statements. They should ask questions for anything that looks out of the ordinary and review the supporting documentation to ensure the transaction has been properly recorded and relates to the business.

Fraud can be detected and losses mitigated by knowing the red flags of fraud. In 85% of cases, fraudsters displayed at least one behavioral red flag and in 50% of cases they exhibited multiple red flags. Red flags can vary by position and by gender but it’s important to know your employees’ behaviors, which behaviors might present greater risk, and question any unusual changes in behavior. The fraud perpetrators can also participate in misconduct other than the fraud such as bullying or intimidation, excessive absenteeism, or poor performance evaluations.

If all these statistics have you worried and you’re ready to talk about fraud, MHCS can help ease your concerns. Here are some ways we can help.

• Tips are by far the most common method of initial detection with over half of the tips coming from employees and nearly one-third from outside parties. In addition, fraud losses were 50% smaller at organizations with hotlines than those without. MHCS partners with Red Flag Reporting to offer your company hotline services. Tips can be reported by phone and online and can be done completely anonymously. Through working with MHCS, we can assist you if any investigation is needed after a tip is reported.

• The risks that posed that greatest threats to organizations include inability to effectively identify or address known fraud risks and the lack of effective checks and balances. MHCS can help you perform a fraud prevention checklist to determine risks to your business. We can also assist in designing internal control processes that will prevent and detect fraud but could also lead to efficiency in the processes in your business.
• If you suspect fraud in your business, we can help you investigate the fraud to determine the extent of the losses. The median losses in each industry can be substantial to any business and statistics show that over half of victims recover nothing. We can work with legal counsel to provide litigation support and expert witness testimony.

While talking about fraud can be scary, the consequences for not preparing can be even scarier. Let MHCS help you put a plan in place to protect your business.

Jenny Smith, CPA | Director
JSmith@MHCScpa.com