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September 04, 2013

BBB offers tips to protect against occupational fraud

In an ideal world, businesses would all be composed of honest employees, dealing only with other honest businesses and consumers. Unfortunately, that isn’t always the case. Your workplace might be made up of trustworthy individuals, but it pays to make sure a system of accountability is in place so it stays that way.

According to the Association of Certified Fraud Examiners’ (ACFE) 2012 Report to the Nations, the typical organization loses 5 percent of its revenues to fraud, or about $3.5 trillion when applied to the 2011 estimated Gross World Product (ACFE applied the percentage to the 2011 estimated Gross World Product of $70.28 trillion).

The ACFE case study found the median loss to occupational fraud was $140,000 between January 2010 and December 2011. More than a fifth of the cases were losses of at least $1 million. Nearly half of victim organizations did not recover any losses suffered through fraud.

In the ACFE study, 87 percent of fraud instances happened through asset misappropriation schemes, with a median loss of $120,000. Financial statement fraud schemes made up only 8 percent of the cases, but caused the biggest median loss at $1 million.

Workplace fraud is a serious threat to small businesses in particular, because they often have fewer anti-fraud safeguards compared to larger companies. Safeguards include formal management reviews, employee support programs, internal and external audits and tip hotlines.

BBB recommends the following tips for businesses to protect against workplace fraud:

  • Know the warning signs. According to the Small Business Administration, most fraudsters exhibit behavioral traits that can serve as warning signs. Potential red flags include financial records sometimes disappearing from the workplace, as well as an employee: not taking vacations, being overly-protective about their workplace, preferring to work unsupervised or at home, having unexplained debt or unexpected changes in behavior.

  • Implement an anonymous fraud hotline. Make it easy for employees, customers and vendors to anonymously report fraudulent activity. According to ACFE, more fraud schemes were uncovered through tips than any other way. Actively encourage employees to report suspicious activity, as well as enact and emphasize an anti-retaliation policy.

  • Have written fraud procedures and policies. Your company should make sure every employee knows what to do when fraud is suspected or discovered, including when to notify authorities and how to communicate both in and outside the business.

  • Provide anti-fraud training. Take the time to provide both new and existing employees with the education they need to help you fight fraud.

  • Protect electronic assets. Electronic records are vulnerable to attack from both inside and outside your organization. Make sure your IT department has your business secured with features like network security controls, remote access controls and application security controls.

  • Conduct background checks. Thoroughly pre-screen new hires, new vendors, suppliers and business partners. It takes time, but it will pay off the first time you spot a red flag.

  • Make someone responsible for fraud detection. Consider appointing a “fraud czar” to make sure your security procedures don’t fall through the cracks.

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