Corporate Fraud: Why It’s a Bigger Problem Than You Think

With the likes of Home Depot and Target, fraud and data breaches have been getting their fair share of news coverage lately. While consumers may be concerned about their credit card numbers being stolen and used by cyber thieves, it’s actually executives and board members who should be just as worried – if not more so – about their company assets being jeopardized.
 

Many corporations assume their CPAs will detect a problem if there is one. But statistics show that independent CPAs are only successful 3% of the time. The justification is that they are not engaged to detect fraud or security issues. Management has a bit of a better success rate, at 7%, but it’s only purely by accident they typically stumble across fraud or a security breach.

Fraud and data breaches aren’t going away any time soon. In fact, thanks to technology and easy access to data, there will likely be more instances of them in the future. And for a corporation, a breach can be deadly. Just consider these statistics from the “2014 Report to the Nations on Occupational Fraud and Abuse” below:

  • For a typical organization, 5% of revenue is lost each year due to fraud.
  • The country with the greatest fraud by both number of instances and the dollar amount is the United States. Other than Brazil, in the U.S., it’s almost double than in any other country.
  • Executives commit 19% of fraud.
  • 77% of fraud is associated with the following departments: accounting, finance, sales, customer service and operations.
  • Average fraud occurs within an organization for more than 15 months.
  • Private companies are at a greater risk than public entities. (Of course, government is in a league of its own with the lack of controls, amount of cash transactions, and very limited accountability structures.)

Who is most likely to commit fraud at your company?

While there is no template for fraud or single face of a perpetrator, there are some trends to note, including the following:

  • Fraud most often happens in banking and financial institutions, followed by government (see above comments) and healthcare, in the finance and accounting departments.
  • In fact, the billing function is associated with +22% of cases of fraud.
  • Interestingly, the more education an individual has, the higher the dollar amount of the fraud and the number of occurrences. For example, someone with a post-graduate degree is three times more likely to commit fraud than an individual with just some college education.
  • Perpetrators have typically been with an organization for 5+ years.

How to Mitigate Fraud

Protect your organization by:

  • Having a professional, certified financial  forensics expert conduct a surprise audit. Evidence not obtained through professional means has little to no value in a court of law.
  • Having an independent certified forensic examiner (NOT your audit firm) conduct a financial forensics exam of high- risk areas.
  • Building an independent, active and progressive board.
  • Promoting strong ethics throughout the organization.
  • Prosecuting those caught. Only about 40% of perpetrators found are referred to law authorities because organizations are fearful of bad publicity. This speaks volumes and sends the message that the chances of being turned over to law enforcement are relatively small. In addition, only 50% of those prosecuted are found guilty and more than 20% of cases of fraud are “privately settled.”

The statistics shared in this article are certainly alarming. That’s why it’s so important for business leaders to ignore the social ramifications of reporting fraud and take a pro-active approach to combatting it. Think of what’s at stake. After all, what’s an additional 5% in business revenue worth to your company and its future?