Fighting Fraud During a Challenging Economy

Every year U.S. organizations lose seven percent of revenue annually to fraud. Northern Michigan is no different than the rest of the country. Incidents of fraud are as prevalent here as they are elsewhere. And as the economy struggles, incidents of business fraud appear to be on the rise. Worse yet, the amount of money involved is skyrocketing.

The best way to protect your business? First, know the possibilities. Occupational fraud typically falls into one of three categories: a) asset misappropriation, such as payroll fraud, skimming or false invoicing; b) corruption, such as bribes or conflicts of interest; and, c) financial statement fraud, such as reporting fictitious revenues or concealing expenses to make an organization seem more profitable.

Of those, misappropriation of funds is the most prevalent. And employee embezzlement poses the greatest threat; its incident rates have risen the most during the past two years. Identity theft, con schemes, securities fraud and other frauds by unrelated third parties are also on the rise.

For fraud to occur, three factors need to be in place: pressure, opportunity and the ability to rationalize illegal behavior – all of which tend to rise during economic hardships. Financial strain is causing intense pressure on individuals as well as entire organizations. Cutbacks in workforce and other expenditures sometime carry over to fewer internal controls or fraud prevention measures, which then create greater opportunity for fraud. Individuals who might never have previously considered an unthinkable act begin to rationalize the possibility when they're feeling helpless and pessimistic in light of bad financial news and mounting financial pressure.

Since economic recovery is a slow process, the trends will probably not change soon. Therefore, implementing and maintaining comprehensive, proactive fraud prevention programs in the workplace becomes very important. Employers can take a number of steps.

Acknowledge employee pressures with proactive strategies. Pressure is considered by many professionals to be the biggest contributing factor to fraud. Proactive employee-support programs aid effective fraud prevention. Measures like employee counseling, open-door policies and employee assistance programs can help alleviate the pressures that could lead to illegal acts.

Maintain strong internal control systems. Implement and maintain preventive controls like fraud training for employees and managers, and segregation of duties. Consider too, detective controls, such as fraud hotlines, internal audit departments and independent audits. Make sure that employees recognize the warning signs of fraud and the procedures for reporting suspicious behavior. It's also vitally important to separate financial functions and responsibilities to assure that adequate checks and balances are in place, and no single person is handling the money and the record-keeping function. Conduct surprise audits, especially in currency intensive businesses.

Keep fraud deterrence a strategic priority. Make sure that proactive antifraud controls are a top priority, in spite of downsizing or cost reductions; layoffs have the potential to leave gaps in internal controls, at the same time that the remaining employees may be feeling added pressure and decreased morale.

If needed, call in an expert. Fraud examination is not a core businesses component for most organizations. Expertise is available to conduct internal control check-ups, provide guidance on procedures and confer. If fraud is suspected or discovered, it is important to address the situation immediately to protect the organization's valuable economic resources.

Heidi M. Wendel, CPA, CFE, is a Certified Fraud Examiner and partner at Dennis, Gartland & Niergarth in Traverse City, where she oversees the Audit Department and DGN's Government/Nonprofit Niche Team. She provides extensive audit services to a range of industry sectors, including government, education, agriculture, manufacturing, co-operatives, business, schools and nonprofit organizations. 231.946.1722,