Occupational Fraud : "The use of one's occupation for
personal enrichment through the deliberate misuse or misapplication
of the employing organization's resources or assets."
Occupational fraud is a widespread problem that affects
virtually every organization, no matter what its industry,
size or location. According to the Association of Certified Fraud Examiners (www.acfe.com),
the typical U.S. organization loses 6 percent of its annual
revenues to fraud. Based on the 2003 U.S. GDP, that adds up
to about $660 billion in losses.
Insider fraud alone does not usually take a company down. However,
our experience shows that as a company begins to experience
significant difficulties, it becomes more likely that its management
or employees may be tempted to act fraudulently to conceal problems
in an attempt to save the company.
Those outside the day-to-day operations of a company may not
be able to prevent fraud from occurring, but there are plenty
of warning signs that may alert you to potential trouble. Heeding
these suggestions may help you protect their interests and minimize
losses
 Look
for indicators of the company's business ethics. Check its Web
site, its human resources manuals, its mission statement. Has
the company taken a proactive approach to dealing with the possibility
of fraud? Owners and management teams that use education, hotlines
and surprise audits to increase the perception of detection
are likely to experience fewer, and less costly, incidences
of theft.
Monitor
the responsiveness of the company's management. Do they avoid
or delay meetings with
outside stakeholders? Do illnesses, vacations and
schedule conflicts always seem to get in the way?
Perhaps there's something they want to hide.
Be wary of reporting red flags. A lack of timely financial information
may be masking larger dangers.
Businesses can take significant steps to prevent fraud and,
as with all cultural issues, it starts at the top. Top management
must communicate to all managers that they are responsible for
managing fraud risks within their areas of jurisdiction. Boards
of directors and top management must establish processes for
oversight of fraud risks.
|
Even with oversight in place, a report by the Association
of Certified Fraud Examiners noted that three-quarters
of the studied organizations victimized by fraud had external
audit procedures at the time the fraud occurred,
and more than half had internal audit procedures as
well. Clearly, these procedures, while helpful, are not
enough to prevent fraud. Interestingly, the Association
did find that the tactic that had the greatest impact on
minimizing losses was setting up anonymous fraud
hotlines. Publicly owned companies subject to the
Sarbanes-Oxley Act must have confidential reporting
mechanisms in place; companies not subject to Sarbanes-
Oxley would do well to set up such systems too.
Finally, the Association found that confidential reporting
procedures are even more effective when the reporting
channel is open to customers, vendors and other third
parties, in addition to employees.
The Best Defense
In our practice we have seen time and time again that companies
that do not proactively approach fraud will experience significantly
more instances of theft.
As logical as it seems that all companies should have strong
ethics policies and procedures to minimize fraud, many do not.
To prevent fraud, proactive owners and managers can increase
detection through education, oversight, hotlines, surprise audits
and overall ethical climates. For this reason, all stakeholders
should assess the standards of the businesses with which they
are involved and be alert to any changes in business practices.
For warning signs of fraud, see Tip
Sheet.
|
