Reporting fraud confidentially

Statistics have shown that approximately 46% of all internal frauds are reported or brought to the attention of company management by employee or insider tips. Given that information, doesn’t it make sense to have a reporting mechanism in place for employees to report suspicious or errant behavior, without fear of retribution or retaliation? Sadly, most companies do not have such a process in place. At Fraud Investigative Services, we are giving consideration to offering such a service as a neutral third party in the form of a 24 hour hotline.  I would like to hear some comments about whether such a service would be of interest.

Workplace fraud: the truth

  • Fraud, by its very nature, does not lend itself to being scientifically observed or measured in an accurate manner. One of the primary characteristics of fraud is that it is clandestine, or hidden; almost all fraud involves the attempted concealment of the crime.
  • Certified Fraud Examiners estimate that seven percent of revenues are lost as a result of occupational fraud and abuse. Applied to the U.S. Gross Domestic Product, this translates to losses of approximately $994 billion or about $6,000 per employee.
  • All occupational frauds fall into one of three categories: asset misappropriations, corruption, or fraudulent financial statements.
  • Occupational frauds were most often committed by the accounting department or upper management.

Avoid getting blindsided by fraud!

 The last thing a small business needs now is fraud.

Moderately-sized companies are already struggling enough in the fragile economy. Getting ripped off by a dishonest employee can be a crippling blow.

Fraud of American companies isn’t pocket change: a 2008 survey by the Association of Certified Fraud Examiners estimated that U.S. organizations lose 7% of their annual revenues to fraud — nearly $100 billion in 2008. The damage is the worst among small businesses, where the median loss suffered by organizations with fewer than 100 employees was $200,000.

True, the time and funds it takes to prevent fraud can seem intimidating. But taking basic precautions and making a small investment early on can pay big dividends.

Even though time and resources are scarce when you’re a small business owner, you should make fighting fraud a priority because, in a tough economy, you literally cannot afford to fall prey to scammers.

Preventing and deterring fraud is much more effective than trying to recover losses after the fact. The economy is showing signs of recovery, but damaging fraud schemes can compound the financial woes of a struggling organization.

Check Things Out

A critical step in fraud prevention is taking the time to check things out.

ACFE notes that high risk areas like financial or inventory departments are “obvious targets for routine audits” and recommends surprise checks of those and all parts of the business.

Another tactic is establishing a fraud hotline. According to ACFE, companies with fraud hotlines cut losses by approximately 50% per scheme.

Bank of America notes that speed counts, especially in electronic frauds. That means checking your online accounts often and notifying your bank — and even law enforcement — immediately. You may even want to hire one of ACFE’s Certified Fraud Examiners if the attack is particularly damaging.

The implementation of anti-fraud controls can save you lots of money. Not convinced? The findings of the ACFE study showed that there were significantly lower losses with precautions in place. For example, organizations (including large companies) that conducted surprise audits suffered a median loss of $70,000, while those that did not had a median loss of $207,000.

So, get a Fraud Risk Checkup, put some basic precautions in place, and give things a regular sniff test.

Who knows — it might just save your small business.

Be Proactive

Brace your business for the schemes. ACFE emphasizes being proactive: “Establish and maintain internal controls specifically designed to prevent and detect fraud.”

A big part of that is training employees to spot it: “Do workers know the warning signs of fraud?” Ensure that staff know at least some basic fraud prevention techniques.”

Another important step is securing data from hacking attacks. Visa estimates that approximately 85% of data breaches occur at the small business level via schemes that can both steal money and hurt customer confidence.

Says BBB’s Southwick: “If a data breach strikes your business, not only can resolving the issue take an immediate investment of time and money, customer trust can take a serious hit and that will affect your bottom line in the long run as well.”

The Bureau recommends “taking proactive, strategic steps to protect your customer and employee data — and developing a plan for how you would respond should something occur that compromises that data.” (There’s a thorough step-by-step guide from BBB here.)

What To Know About Fraud


The first step is to have a general awareness of common schemes.

Small businesses are not immune to the work of scammers and it’s important for owners to get educated and then share what they learn with their employees so they can identify and thwart any attempts to defraud your business.

According to the ACFE study, check tampering and fraudulent billing are the most common small business fraud schemes.

To that end, Bank of America recommends eliminating paper checks: “The more checks there are circulating for your company, the greater the chance they may be intercepted, duplicated or manipulated by a fraudster.” Use of an Automated Clearing House and direct deposit can help. “With direct deposit, you eliminate checks written to consumers for payroll, reimbursement and insurance,” says Bank of America. “Both tools can help prevent criminals from gaining access to accounts and from altering or counterfeiting checks.”

If you must use paper checks, create a lockbox. “If you have a hundred accounts sending you a check every month you have a hundred opportunities for financial fraud,” notes Bank of America. “With lockbox, all checks are directed to a third party — eliminating the fraudster’s opportunity.”

Even if customers are using credit cards, there are still plenty of schemes, especially when there’s no physical plastic. “When a card is not present,” warns Visa in a fraud prevention guide, “your fraud risk rises.” Visa adds: “You could end up with lost revenue, higher operational costs, and potentially even your ability to accept payment cards.