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Fight Back Against Internal Fraud

08/26/2022 Stephanie Allgeyer

Internal fraud drains approximately $4 trillion annually from global businesses, according to an estimate by the Association of Certified Fraud Examiners (ACFE).

The median loss from internal fraud is $117,000, according to ACFE’s latest Report to the Nations.

Some industries have higher than average fraud costs from the ACFE’s Report.

Real Estate                                                          $435,000

Transportation and warehousing             $205,000

Construction                                                       $203,000

Government and Public Relations             $150,000

Manufacturing                                                     $177,000

Although companies can experience pilferage from customers, vendors and other sources, employees account for the highest losses, when considering offenses such as fraudulent insurance claims, unauthorized time off and theft of proprietary information. Crimes can be as simple as stealing company supplies or as complex as sophisticated financial statement fraud.

More specifically, fraud by managers and key executives generates the highest dollar losses because these employees are in a good position to falsify financial, credential, work-related or test-related documents for personal gain.

Some companies are more susceptible to corrupt business practices than other industries. This can include bribery and state capture.

While external audits of financial statements have procedures to detect fraud, only 4% of the fraud was detected from external audits. Internal audits detected 16% of fraud – only second to tips – which helped identify 42% of the fraud cases identified in the ACFE Report.

What can your company do to prevent theft? The ACFE Report found these measures are effective:

  • Improve internal controls. For example, do not allow the same employee to keep books, collect funds, write checks and reconcile bank accounts. Arrange for monthly bank statements to be delivered unopened to the company owner, who should review them for unusual transactions, such as declining deposits and checks to unfamiliar parties.
  • Conduct background checks on new employees.
  • Arrange for fraud audits by the company’s outside accountants or an internal audit department. CPAs can conduct regular independent internal control studies of cash accounts, bank statements and other items to detect criminal activity. Surprise audits are an effective, yet underutilized, tool in the fight against fraud.
  • Be willing to prosecute perpetrators. Some organizations that were victimized by fraud didn’t report the cases to law enforcement because: they were afraid of bad publicity; reached a private settlement; wanted closure; or considered internal punishment sufficient.
  • Provide ethics training for employees. Educate staff members about the possible sources of fraud and consequences, such as the loss of jobs, raises and profits.
  • Institute anonymous fraud reporting mechanisms, such as hotlines. Fraud is commonly discovered through tips from employees, vendors, customers or other sources. These people are frequently in a position to see violations of company policies or excessive personal spending by colleagues.
  • Install workplace surveillance devices. For example, a video camera monitoring a loading dock where theft is suspected.
  • Look for behavioral red flags including the perpetrator living beyond his or her means and having financial difficulties. They can also involve an unwillingness to share duties, a “wheeler-dealer” attitude, divorce or family issues, addiction problems, refusal to take vacations and an unusually close association with vendors or customers.

Take a zero tolerance stand on fraud. With a few basic procedures in place, internal business theft can be significantly reduced — or even eliminated — so your business can flourish. For additional information or guidance related to internal fraud, contact Stephanie Allgeyer at sallgeyer@vlcpa.com or 800.887.0434.

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