Many business owners are so focused on driving sales, increasing revenues, and protecting the company against competitive threats that they completely miss another threat that could be even more damaging — that of internal fraud. While larger corporations may be able to withstand an attack from within, depending on the size and scope of the incident, corporate fraud may swamp a smaller business to the point of drowning. This puts the issue high on the list of items to guard against.
According to the Association of Certified Fraud Examiners (ACFE) 2020 Report to the Nations, companies lose an average of 5% of annual revenues to fraud yearly. If you’re in business for any length of time, you’ll probably have to deal with the impact of corporate fraud at some point.
What is Corporate Fraud?
Corporate fraud, also referred to as organizational or employee fraud, refers to an act committed by an employee of the company against the employer. The employee uses the company’s property, assets, or other resources in an inappropriate way to recognize personal gains.
There are generally three types of corporate fraud:
Asset misappropriation. Asset misappropriation is the most common form of fraud. It occurs when an employee steals or misuses the company’s resources. Asset misappropriation may occur through the theft of cash or goods, inflated expense reports, tampering with the billing system, or payroll fraud.
Asset misappropriation accounted for approximately 89% of the fraud cases examined in the ACFE study. While this is a large percentage, these cases are usually the least costly for a company to resolve and recover from.
Corruption. Corruption cases are the next most common fraud type and are usually more difficult to identify. They often involve upper management, resulting in higher stakes for all concerned.
Corruption cases occur when upper-level managers use power or influence in a business transaction to gain a favorable outcome, either directly or indirectly. Fraudulent activities may include bribes and conflicts of interest that benefit the person handling the negotiation on behalf of the company. In the ACFE study, 38% of the cases identified involved corruption.
Financial statement fraud. Financial statement fraud is the least common, probably because fewer employees have access to the company’s financials. Although the occurrence of this type of fraud is low — only about 10% — the financial impact is higher than other types of fraud.
Financial statement fraud occurs when an employee purposely omits, falsifies, or misstates company data in financial reports to encourage false assumptions about the company’s overall health.
How to Mitigate Corporate Fraud
Fraud experts recommend taking the following steps to prevent fraud in your company. Remember that a reputable CPA can help with corporate oversight and compliance, significantly reducing the potential for internal fraud.
Set up strong internal controls. One of the best ways to prevent corporate fraud is to have a system of internal controls that makes fraud harder to commit.
- Set up accounting systems that require unique logins and two-factor identification.
- Mandate the review and approval of more than one manager for financial statements.
- Limit access to resources to only those employees who need access to do their jobs.
- Set up a document retention policy throughout the company so that relevant documents can be accessed quickly if issues arise.
- Implement anti-fraud policies, and educate employees on the warning signs of corporate fraud. Give them a safe way to report fraud if they see it.
Know your employees. A business is only as good as the people who work there. A little extra time spent up-front may help you avoid fraud in the future.
- Ensure the HR department knows the type of employee you’re looking for.
- Formalize the hiring process with background checks and drug tests for all new hires.
- Monitor employee morale and take steps to raise it, if necessary.
- Keep the lines of communication open, so employees feel comfortable voicing concerns.
Perform regular audits. There’s no better way to mitigate the chance of corporate fraud than by conducting regular audits of the books. It’s best to hire outside experts for this. Third-party accountants know what to look for when auditing a company’s financials, and because they have no ties to the business, they’re not afraid to point out potential issues.
Adams Accounting Solutions is On Your Side
Adams Accounting Solutions specializes in small business consulting and tax preparation. We know what to look for when conducting audits for our clients. We’ll help you spot weaknesses in your systems, set up new ones if needed, and mitigate the potential for corporate fraud. Call today to schedule an appointment. We look forward to joining the team!
