By B.J. Hoffman
Special to the Legal
Your law firm and corporate clients are likely losing 5 percent of annual revenues to fraud, waste and abuse, according to the most recent study conducted by the Association of Certified Fraud Examiners. The numbers are staggering: A firm with revenues of $5 million loses an average of $250,000 annually. In many years, these amounts would be the difference between surpluses and deficits. In today’s challenging economy, however, such losses can result in an organization’s death.
Executives typically tend to deny the existence of fraud. I often hear company leadership proclaim, “We have the best employees – they would never steal,” or “If there was fraud, I would know about it.” Sadly, these blinders obscure reality and tend to result in many years of diminished profits.
Fraud, waste and abuse are everywhere. Sometimes the schemes are large – involving purchasing (such as kickbacks paid to your employees or fake vendors), collections (including the theft of company accounts receivable or the “skimming” of cash), or employee incentive frauds (the booking of fictitious sales or false accounting entries that allow employees to hit sales targets). Sometimes the schemes are smaller, but add up over time – the submission of fictitious employee expense reimbursements, the personal use of company property or the theft of inventory.
Fortunately, there are many ways to minimize the exposure to losses without turning the workplace into a police state and without incurring major internal control related expenses.
- Segregate incompatible employee duties. Generally, it is wise to divide responsibilities among several staff members so that the authorization of business transactions, the physical custody over assets and the accounting responsibilities for those assets are assigned to separate individuals.
- Broadcast your resolve that fraud and abuse are unacceptable. Make sure they are addressed in your employee manual and that the manual is distributed regularly. The tone from the top of an organization goes a long way in defining the culture of a company. Draft an ethics policy and compel all employees to acknowledge the policy annually.
- Receive copies of all bank statements and payroll service reports independent of the accounting department, review the reports and make a regular practice of inquiring about transactions. Employees who know that someone else is truly watching are less likely to perpetrate frauds.
- Always conduct background searches on potential new hires.
- Secure fidelity bond insurance coverage.
- Look for red flags or indicators of fraudulent behavior. Employees who work strange hours, who never take vacations or who appear to live beyond their means might be involved in activities detrimental to the organization.
There are many more policies and procedures that can be effective deterrents to unethical behavior. The goal should be to create an environment where employees understand that fraud and abuse are intolerable, and where a “perception of detection” exists, namely that employees perceive that any untoward act would be quickly discovered.
The implementation of effective internal controls should go a long way toward reducing the losses experienced by most companies. A reduction of the rate of loss from 5 percent to 3 percent can result in significant savings for a business, which far outweigh the costs of implementation.
B.J. Hoffman is a certified public accountant and certified fraud examiner for Citrin Cooperman, an accounting, tax and business consulting firm. He is a partner in the Philadelphia office. He provides clients with a mix of audit, tax and litigation support services. He often works with closely held entities in a variety of industries including professional service firms and real estate enterprises, and can be reached at email@example.com or 215-545-4800.