January 11, 2006

In a recent report released by the Association of Certified Fraud Examiners, it’s estimated that U.S. organizations are suffering losses of $660 billion annually due to fraudulent activity. Put into perspective, that sum exceeds the budget for the U.S. Department of Defense.

The survey revealed that small organizations were significantly impacted by fraud in that nearly 46 percent of the reported cases involved organizations with less than 100 employees. The median loss at private companies was found to be $123,000 per occurrence while governmental agencies and not-for-profits suffered median losses of $37,500 and $100,000, respectively. Asset misappropriation was the most common form of occupational fraud and abuse comprising 92.7 percent of the reported cases with a median loss to the organization of $93,000. Not surprisingly, cash was most often the misappropriated asset accounting for 93.4 percent of the asset misappropriations and a median loss of $98,000.

What can organizations do to protect themselves and lower the risk of loss to occupational fraud and abuse?

• Set the tone from the top that such behavior and losses will not be tolerated. This involves prosecuting offenders civilly and/or criminally.

• Conduct background checks on all new hires that will be in sensitive positions and have access to the company’s assets.

• Check references in all cases and verify all other pertinent information such as degrees claimed, employment history and educational background. Include as part of the employment application an agreement by the applicant that a background check may be performed as part of the application process and at any time thereafter if the applicant is employed.

• Include a right to audit clause in your purchase orders. The right to audit your vendors is essential, especially in cases where collusion with employees or other third parties is suspected. Proof of kickbacks and bid rigging is more likely to be found in your vendor’s accounting records than your own.

• Implement a sound system of accounting and asset control consistent with the inherent risks facing your organization and ensure compliance with adopted procedures.

• Develop procedures to facilitate tips from customers, vendors and other employees of suspected fraudulent activity. Tips from these and anonymous sources are the most common means of discovering employee fraud and abuse in small organizations.

• Implement procedures to have your financial records analyzed for red flags that may signal your organization may be the victim of occupational fraud and abuse.

• Review your business insurance coverage to determine the level of coverage for losses due to employee misconduct. This coverage is often set at a low standard level of $5,000 or $10,000. For minimal cost, coverage can be increased to a level appropriate for your organization and provide for recovery of losses and the cost of investigation.

• Adequate insurance is essential. The Fraud Examiner survey found that over half the victims of occupational fraud and abuse were able to recover less than 50 percent of their loss. Most organizations would not think of leaving its property, machinery and inventory underinsured, but often have inadequate coverage for their cash and accounts receivable.