Corporate Fraud

by Paul McCormack, MBA, CFE

ACFE 2014 Report to the Nations states that organizations typically lose 5% of its revenue to fraud each year. Most of the time, fraud takes place below the radar, and upon discovering it, companies tend to want to move forward as quickly as possible without notifying the public of the fraudulent activity. The smallest organizations tend to suffer the largest median loss as these organizations typically employ fewer anti-fraud controls than their larger counterparts. It is not unusual for small business to lose a significant amount to fraud and end up closing their doors for good.

A few of the largest and most impactful reasons small businesses are falling into fraud and revenue losses are:

• Lack of knowledge – small business believe fraud is not a threat; therefore they do not apply the appropriate internal controls necessary to prevent fraud.
• Not a priority – the primary importance, understandably, is to generate revenue. However, with revenue being generated, unidentified costs are more likely to be lost in the form of fraud.

It is important to note that the presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Internal controls can make a significant difference in fraud schemes, but it is important to monitor those internal controls to ensure their effectiveness.

The largest losses tend to come from the higher level authority, as this individual (or individuals) have established a trusted role within the company. They understand the control environment and these individuals feel comfortable and secure acting out fraudulent activity because of the relationships and sense of trust that surrounds them.