August 03, 2007
The fall of corporate behemoths like Enron and WorldCom demonstrates that fraud can bring down even the mightiest of corporations. The magnitude of the problem is staggering.
According to a recent survey conducted by the Association of Certified Fraud Examiners — its 2006 Report to the Nation on Occupational Fraud and Abuse — a typical organization loses 5 percent of its annual revenues to occupational fraud.
Corporate giants aren’t the only organizations dealing with this problem. Government and not-for-profit organizations also experience the devastating consequences of fraud. The median loss suffered by organizations with fewer than 100 employees was $190,000 per scheme — even higher than losses in larger organizations.
Why are small and midsized organizations so hard hit by fraud? Most often, it’s because these organizations are less likely to have robust fraud management programs, especially at smaller organizations where many agency and NFP executives believe that comprehensive programs are beyond the reach of their limited budgets. Fortunately, public administrators can take simple steps to reduce the cost of fraud without breaking the budget. In many cases, the following steps can even pay for themselves.
- Establish an anonymous fraud hotline. Fraud schemes at government and NFP organizations are more often identified through tips than by any other means. Organizations with fraud reporting hotlines tend to identify fraud earlier — before problems can grow. In fact, according to the survey, the median cost of fraud schemes perpetrated in companies with reporting hotlines is about half the median cost of schemes committed in companies without hotlines. And because many service providers will staff a 24-hour hotline and charge based on number of calls received, it’s feasible to implement a hotline in nearly any organization.
- Provide fraud awareness and ethics training for all employees. According to the survey, organizations that provided fraud awareness training reduced the cost of the average fraud scheme by half. With a few hours of relatively low cost training, the likelihood that employees will notice and report a problem increases significantly.
- Ensure regular internal and external audits. Organizations with an internal audit function had a median loss of $120,000 per incident, compared to $218,000 per incident where there were no internal audits. In addition to detecting incidents that have already occurred, audits can deter employees from committing fraud. Given the average savings, some organizations find that internal audits often pay for themselves in fraud reduction savings alone.
- Conduct surprise audits. Audit programs are especially effective in deterring fraud when surprise audits are performed. Among organizations that conduct surprise audits, the average fraud incident was about $100, 000 — half the cost of the average fraud incident among companies that don’t perform surprise audits. Despite their effectiveness, most government and public administration sector organizations do not conduct surprise audits. While 76 percent of these organizations had an internal audit function, only about 40 percent conducted unannounced audits.
These measures are just a few examples of steps to include in a fraud management program. The most effective programs are designed specifically to fit an individual organization. Depending on factors such as size and industry, other anti-fraud measures should be considered.
Controlling fraud is a key management responsibility. While publicly traded companies are required by law to have a fraud management program, government and NFP organizations often overlook such programs. Given the rising cost of fraud and the potential damage to an organization and its reputation, a comprehensive, tailored anti-fraud program is essential.
Jodi Swauger is a director with RSM McGladrey. For more information, contact her at [email protected].