By: Mandy Lam
The world tends to be on high alert for cybersecurity and data breaches, but fraud, especially from within an organization, is certainly something that should not be ignored. Internal fraud is more common and causes more financial loss to organizations than frauds committed by external third parties. Every organization should have a deliberate plan to prevent and detect fraud, regardless of their size.
According to the Association of Certified Fraud Examiners’ (ACFE’s) 2018 Report to the Nations (Report), small businesses with less than 100 employees lost approximately $200,000 per scheme to fraud, almost twice as much as large businesses. While some fraud incidents are staggeringly more costly and last many years, the median cost of fraud is $130,000 per instance and the median duration is 16 months. Other highlights from the Report include studies showing that 89% of fraud perpetrators had never been charged with or had a prior fraud conviction and that the magnitude of losses tends to increase along with the tenure of the perpetrator.
Every organization faces some risk of fraud. However, most people tend to dismiss the idea that fraud could be occurring within their organization for reasons such as company culture, robust controls, trusted employees, etc. Statistics show that fraud does not discriminate and it happens every day in all types of industries and all types of organizations, including large publicly traded companies, local establishments, and non-profit organizations.
To prevent fraud, one needs to understand why people commit fraud in the first place because fraud does not happen in a vacuum. There are many reasons for fraud and various factors can contribute to organizations becoming a victim. Typically when fraud occurs, there are three factors present –Pressure, Opportunity, and Rationalization. These elements can work together to sway an individual into perpetrating a fraud scheme. Since controlling an individual’s pressure and rationalization are impractical, making a conscious effort to suppress opportunity is key in preventing and detecting fraud. Having a good system of controls in place is the most direct and effective way to minimize the opportunity.
Ponder the following questions:
- What is your risk of exposure to fraud?
- Does your organization have adequate controls in place?
- Have you evaluated your existing system of internal controls?
- Have you developed and documented policies and procedures for various transaction areas?
- Do you provide training programs for management on best practices on fraud prevention?
Might a fraud scheme be occurring in your organization that has yet to surface? With the new year coming, it may be the perfect time to (re)visit your current policies, procedures, and system of controls. Don’t be a victim of fraud! Contact Snyder Cohn to evaluate your organization’s vulnerability to fraud and create an action plan for minimizing the risks.