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In a Troubling Economy, Beware of Fraud
In difficult times, when otherwise honest individuals can be provoked to do dishonorable things, fraud prevention and detection should become an organizational priority.
"Employees may commit fraud for their own benefit or the company's," says Anthony Masztak, manager for Gleason & Associates, "and either situation can jeopardize an organization's existence."
Who's at Risk?
Companies that are having difficulty obtaining financing or meeting analysts' expectations are among those that need to be acutely aware of organizational fraud risks. The cost of complacence is high. According to a 2008 report on occupational fraud and abuse by the Association of Certified Fraud Examiners, the median loss to organizations involved in fraudulent financial statement schemes was $2 million per incident. On average, these companies lost about 7 percent of annual revenues due to these fraudulent acts.
Where to Look
Distressed companies often resort to accounting manipulations in an attempt to inflate their financial performance. If you're involved in generating, reviewing or evaluating a company's financial statements, beware of these opportunities for fraud:
- Recording fictitious revenue
- Failing to record known liabilities and expenses
- Improper valuing of tangible and intangible assets
- Failing to record impairment charges
- Capitalizing expenses inappropriately
- Utilizing improper off-balance sheet debt
"Make sure you understand the reasons for various
accounting techniques prior to assisting in the process," Masztak
cautions.
Desperate Measures
The recessionary economy can also increase a company's risk of occupational
fraud. Employees who are experiencing mortgage foreclosures, higher credit
card bills, declining savings or an out-of-work spouse are susceptible
to fraudulent behavior - especially when the bonus, pay raise or
401(k) contribution they anticipated (or already spent) isn't forthcoming.
Fraudulent activities to watch for include:
- Larceny of cash on hand or from deposits
- Theft of non-cash assets such as inventory or intellectual property
- Lapping or write-off schemes in which employees skim receivables and then fudge the bookkeeping so employers and customers remain unaware
- Billing schemes involving shell companies or personal purchases
- Payroll fraud involving ghost employees or falsified wages
- Expense reimbursement schemes involving overstated or fictitious expenses
- Check tampering in which the payee has been altered or the endorsement forged
- Vendor kickbacks or bribery
Next Steps
According to the Association of Certified Fraud Examiners, the median
loss to an organization for occupational schemes was $175,000 per incident.
"Interestingly, three-fourths of the victim organizations altered
their existing internal control system in direct response to the discovery
of the fraud," Masztak explains. "This indicates that most perceived
the fraud to have occurred or succeeded, at least in part, due to a control
weakness. And most weaknesses were attributable to reliance on trusted
employees. Companies that are proactive in tightening controls can avoid
compounding these challenging times with organizational or occupational
frauds."
Excerpted from Briefly
Speaking, a complimentary newsletter published
by Gleason & Associates.
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