Although occupational fraud has slightly declined globally in the past year, privately held companies and small businesses are still being hit hard and at the highest rates compared to their larger counterparts. International Fraud Awareness Week (Nov. 3-9) is an ideal time to download our internal controls checklist, and refresh your knowledge below with some new, vital information on fraud in the workplace and preventive measures to take.

According to the Association of Certified Fraud Examiner’s (AFCE) most recent Report to Nations, privately held companies with fewer than 100 employees were victimized more often than larger companies, with 31.8 percent more cases of fraudulent activity. Making matters even worse, only 49 percent of these companies were able to recover from their losses due to fraud.

This is not to assume that privately held companies and small business should accept the fact that one day their company will be victimized by fraud, but it is important to become aware of the current state of fraud, who is most impacted, what to look out for and how to prevent fraud.

Quick Fraud Facts

 The ACFE Report to the Nations reveals pertinent fraud trends that could benefit companies faced with the threat:

  • 87 percent of occupational fraudsters are first-time offenders with no prior criminal records
  • Fraudsters with more than 10 years on a job cost an average of $225,000 in financial loss for their employer compared to $25,000 for those with fewer than 10 years on the job
  • In 81 percent of all cases reported, the perpetrator had displayed common fraud behavioral red flags, including living beyond their means, experiencing financial difficulties, unusual close relations with vendors and excessive control issues
  • Fraud is most likely found in one of the following departments: accounting, management, operations, sales, and customer service and purchasing
  • Industries affected the most by fraud include financial services, banking, manufacturing, public administration and government

Putting an End to Fraud 

Occupational fraud is not an overnight devious venture for perpetrators. The average fraud activity lasts 18 months before it is detected. With advancements in technology and criminals becoming more savvy and efficient, capturing suspicious activity appears daunting, but there are many common anti-fraud measures that can be established with minimal cost. Victim organizations that implemented anti-fraud controls experienced considerably lower losses and duration-to-detection time than organizations lacking these control, according to the ACFE. Some of the most common anti-fraud controls to benefit privately held companies and small businesses with few dollars spent include:

  1. Hotlines: Research shows that most fraud is captured from tips given by employees. Providing employees with an anonymous hotline number to call in cases of suspicious activity encourages an anti-fraud environment, letting employees know that controls are in place for individuals who attempt to engage in this activity.
  2. Code of conduct: Tips alone can provide great benefit, however, it also helps for employees to understand upfront that fraudulent activity is a significant part of employee misconduct and will not be tolerated. Simply implementing reprimands for fraud and acknowledging it as a form of work abuse sets a tone throughout the entire organization.
  3. Anti-fraud training program: A staff trained in fraud prevention and detection is one of the most effective ways to prevent fraud.  A formal anti-fraud training program should begin at the date of hire and include all of the organization’s employees, regardless of professional level. Training should be interactive, detailing what is expected of each employee, what is considered fraud and how to detect it.
  4. Management review of controls and processes: It is important for management to strictly monitor internal controls within the business to ensure they are efficient and effective. Proper oversight should also be developed, such as a Board of Directors, as they can monitor fraud at the management level.

Alternative Anti-Fraud Controls

While the following controls may be more costly, they have also been effective for detecting occupational fraud:

  •  Surprise audits
  • Software systems, such as Big Data, artificial intelligence (AI) and link analysis to track behavioral patterns of suspicious activity
  • Reviews of employees’ background and references before hire
  • Formal fraud risk assessments
  • Rewards for whistleblowers
  • Established internal audit departments

Anti-Fraud Resources and Best Practices

Stay current on new trends and practices to avoid becoming a victim of occupational fraud. The ACFE offers a variety of reports, presentations and webinars covering this subject, and Doeren Mayhew offers an internal controls checklist. Our certified fraud examiners in Michigan, Houston or Ft. Lauderdale are also available to provide anti-fraud information and resources.