When Will Someone Attempt to Steal from Your Business?

By Gregory S. Dowell

July 6, 2011

“Fraud and falsehood only dread examination.  Trust invites it.” Samuel Johnson

When many people think of fraud, they think of Enron, or maybe Martha Stewart, or maybe Conrad Black.  The reality, unfortunately, is that fraud is much closer to home than most people realize.  All business owners, without exception, need to be on the lookout for fraud.  This is true regardless of the industry in which you operate, includes businesses that are large and small, and especially includes those that have a heavy reliance on trusted employees.

Small businesses, in fact, are much more likely to suffer losses from fraud.  The reason is simple:  Small businesses almost always suffer from poor internal controls and do not have even the most basic fraud prevention controls in place.  In addition, small businesses place a huge reliance on the “trust” factor, meaning that they place a high degree of responsibility into the hands of long-time employees whom they assume to be loyal and trustworthy.

Here are some startling facts on fraud, as released by the Association of Certified Fraud Examiners in their 2010 Report to the Nations on Occupational Fraud and Abuse:

• The typical business loses 5% of its annual gross revenue to fraud.
• The median loss from fraud is $160,000, although one-fourth of fraud losses exceed $1 million.
• The typical fraud lasts 18 months before it is detected.  The longer the fraud lasts, the greater the loss.
• Most fraud is committed by employees at high levels in the organization and in a position of trust (think of your long-time controller to whom you trust all of the banking and accounting).
• More than 85% of employees who commit fraud have never been previously charged for a fraud-related offense.  Background checks alone are not enough.

If you are the kind of business owner who says, “That’s a shame, but it would never happen to me.  Betty (or Bob – you fill in the name) has been with my company for 10 years and I trust her more than I trust myself,” then you are completely at risk.  The typical profile of a fraudster is someone in a position of trust (often in the accounting department) and who is a trusted, long-time employee.

Challenge yourself with this:  Start reading the daily papers, even your local papers, and specifically look for articles on fraud.  Sadly, in Illinois you will find plenty of articles on fraud occurring in the government, but you will also find articles that appear regularly on fraud committed against businesses that will look surprisingly like your own business.  Josh Stockinger of the Daily Herald has done a remarkable job of reporting on fraud.  In recent articles, Mr. Stockinger has reported on the following frauds:

• An accountant at a Glendale Heights moving company stole $1.2 million over the course of many years, beginning in 2003.
• A Wooddale bookkeeper stole $100,000 from her client’s heating and air conditioning business, and also stole another $10,000 from an elderly woman for whom she was hired to provide in-home bookkeeping services.
• An Elk Grove Village man, working as an accounting manager for a transportation company in Itasca, was found guilty of stealing more than $500,000 from his employer.

The embarrassment of admitting that fraud occurred in their organization is the least of a business owner’s worries:  Losses from fraud can easily put you out of business.  Because of the frequency of fraud and the fact that losses from fraud are often significant, CPAs are now required to specifically look for fraud when they perform certified audits, but having a certified audit performed by a CPA firm is not even guaranteed to protect a business.  Auditing a business’ financial statements has many benefits to the business and is a strong step in the right direction, but it is a costly endeavor.  So what can a business owner do?  While there is nothing that can ever be done to totally prevent fraud, there are definitely steps you can take as a business owner to greatly reduce the risk that fraud will occur in your business and, if it does occur, to at least limit the loss.  For example, some steps a business owner can take include:

• Rotate duties between members of your accounting department.  If this is not possible because your accounting department is too small, use an outside CPA firm to provide oversight of critical functions.
• Require your key personnel to take at least one week of consecutive vacation days every year.  Many frauds are discovered when the perpetrator is not around to cover up the fraud.
• Regularly analyze and investigate the vendors that the business uses.  Be sure that the vendors are legitimate and not just fronts for fraudulent activity.
• Conduct surprise audits; these are useful for not only finding fraud, but also in creating a perception throughout the business that fraud will be actively sought and detected.
• Educate employees about what fraud is and how it can cripple a business.  Importantly, let employees know how to report suspicion of fraud in an anonymous manner.
• Perhaps most critically, create the right “tone at the top,” meaning that a business owner and management should consistently and visibly be role models to all those within the organization and manage the business on a day-to-day basis in an ethical manner.  It’s no different from trying to be a good role model for your kids.

Realistically, many of these procedures require the expertise of a CPA firm and, just as important, most businesses need to turn to a CPA firm to provide the discipline and structure to conduct these procedures routinely.  As in so many endeavors, searching for fraud is an area where talk and little action, or inconsistent action, is a waste of time and resources.

Based on the experience we have gathered from decades of experience in working with privately-held businesses of all sizes, our CPA firm has taken a fresh approach to looking for fraud.  When conducting certified audits, our professionals brainstorm and then actively search for ways that fraud could be committed in our client’s businesses.  Working one-on-one with business owners, we also offer specialized procedures for our non-audit engagements, in which we have added specific procedures and techniques that are designed to find fraud.  While we would like to offer these services to all of our businesses, we can not conduct these fraud detection and prevention engagements until we are engaged to do so.  It takes a truly wise and forward-thinking business owner, one who recognizes the risk on his or her business and lifestyle, to commit to a regular program to educate and prevent fraud.

If you would like more information on how we can help your business, please give us a call or an email.  You can reach Greg Dowell at gdowell@bsd-cpa.com, Gary Lasker at glasker@bsd-cpa.com, or Joe Liss at jliss@bsd-cpa.com, or call us at 847-934-0300.