Business Basics: Crime at Work

By Beau Denton January 31, 2014

How to protect your company against theft.

By Lori Johnston

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Don’t be deceived: Your business could be vulnerable to fraud, and the losses could be devastating to your bottom line and reputation.

The typical organization loses 5 percent of its revenues to fraud annually, which the Association of Certified Fraud Examiners (ACFE) estimates totals more than $3.5 trillion globally.

“It’s often the trusted employee who comes in early, who leaves late and who appears to be so much on the up and up who turns out to be, sadly enough, responsible for the pilfering of funds,” says Sgt. Neil Scully of the Sarasota County Sheriff’s Office. “Offend somebody if you need to, but checks and balances are needed.”

Recent local fraud cases have involved check tampering, making up phony vendors, and getting kickbacks from vendors through credit card purchases, says Sarasota Kerkering, Barberio & Co. shareholder Patricia Entsminger, a CPA, certified fraud examiner and certified internal auditor. “It’s the employee they never suspect,” says Entsminger.

The median loss due to fraud to a business, per case, is $140,000, although more than one-fifth of the occupational fraud cases worldwide in the ACFE’s “2012 Report to the Nations on Occupational Fraud and Abuse” suffered far higher losses, more than $1 million in fraud per business.

Amounts can be much larger for bigger organizations and when owners or executives commit the acts. One out of 10 respondents to the 2011 Global Economic Crime Survey by PwC experienced economic crime, which includes misappropriations, fraud, bribery and corruption—and totaled $5 million in losses in the last 12 months.

Few local cases result in criminal charges. Either the company doesn’t want the public embarrassment, or the company’s lack of anti-fraud controls would make it difficult to prosecute the individual, Entsminger says. The ACFE finds that 87 percent of those who commit occupational fraud were not charged or convicted and 84 percent had never been punished or terminated by an employer.

Create anti-fraud procedures to keep employees (and customers, too) from stealing from you. The ACFE also offers a fraud prevention tip sheet. Here’s a checklist.

Establish an anonymous tip hotline. Employee tips are the most common way companies detect fraud, the ACFE says. Still, fraud lasts a median of 18 months before being discovered. Enable workers to confidentially report suspicious behavior. (EthicsPoint and EthicsLine offer telephone, web and mobile hotlines, for example.)

Carefully screen job candidates. Verify past employment and education, check references and conduct a criminal records check through the Florida Department of Law Enforcement. Entsminger adds that employers who have been victimized may not disclose fraud if they want to protect their reputation.

Recognize red flags. The three components of the “fraud triangle” are pressure, opportunity and rationalization. The biggest red flag identified in the ACFE study is living beyond means (36 percent). Others are financial difficulties (27 percent), unusually close association with vendors or customers (19 percent), and excessive control issues, such as not taking time off (18 percent).

Make vacations mandatory. Fraud often is discovered when another employee or the owner covers for a worker and notices inconsistencies.

Cross train employees. Give more than one employee the ability to reconcile bank and petty cash accounts, and have workers occasionally rotate duties. Also, when owners and/or board members review bank statements it sends a message that the company is watching out for potential fraud, Entsminger says.

Create a cash journal. Keep track of petty cash, especially if employees know where the key to the cash box is located. Keep receipts and documentation of cash withdrawn and reconcile those frequently.

See the signals. Keep an eye out for what Scully calls “tattletale devices” around cash registers. Some thieves will account for their pilfering by using matchsticks or pennies to represent dollar amounts they plan to remove later.

Limit access. Have account access be tied to specific job duties, instead of unlimited access. Use caution when naming an employee as a co-signer or authorized user on credit card and checking accounts.

Conduct audits. Review and reconcile financial accounts monthly or quarterly to watch for irregularities, and conduct surprise petty cash reviews. If you can afford it, use an external auditor annually.

Monitor the trash. Management should be responsible for disposing of the trash in the dumpster or accompany the worker handling the task.

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