Beware the Wolf in Sheep’s Clothing!

By Heather L. Brown

“At a time when we have to make such difficult decisions about how to cut back without damaging the things that matter the most, we should strain every sinew to cut error, waste and fraud.” -David Cameron

Every business, large or small, has them. Those one or two employees who are there before the doors open in the morning and are the last to leave at the end of the day. They never need help getting their assignments completed and may even offer to take on duties not typically assigned to them. Sick days are rarities and you can’t recall their last vacation of more than a day or two. These are the types of employees we all dream about, right? Well, while they may, in fact, be the absolute best employees the company may ever have, sometimes we have to fall back on the old adage that when things sound too good to be true, that may be the case. Because while such characteristics may indeed reflect an employee’s sincere loyalty and honest efforts to add value, they are also some of the more common characteristics shared by those engaged in fraud.

It can’t happen to me

I know what you’re thinking. … yeah, yeah, I know my competitors may have employees who take nominal sums of money, reams of paper or other supplies, but nothing major could ever happen here. Fraud, at least the kind that costs serious money, only happens to those “big” companies, those publicly-traded companies where employees are only a number and rarely last for more than a few years. You may even believe small businesses are safe from such frauds because of the smaller employee base, longevity of their service and day-to-day interaction and oversight of the owners and managers, who are far more invested in the business than an average shareholder. While that may be true, it may surprise you to know only a fraction of occupational frauds are experienced by those “big” companies.

The cold hard truth

Let’s face it – unless a fraud is very large, media coverage of the event doesn’t sell a lot of newspapers or magazines. Despite this lack of media coverage, the Report to the Nations on Occupational Fraud and Abuse, a 2010 global fraud study published by the Association of Certified Fraud Examiners, reported that only 32% of nearly 1,900 cases examined were perpetrated against public companies, and that for those occupational frauds committed, the overall median losses were almost 80% higher for organizations with less than 100 employees than those with over 10,000 employees. Another staggering finding was that nearly 54% of those frauds were perpetrated by managers, owners or executives rather than general employees; and approximately 48% of the perpetrators had over six years tenure with the victim organizations, while less than 6% involved employees of less than one year.

Awareness is key

While those statistics can be somewhat scary, research has shown that implementing even a couple of procedures can greatly reduce susceptibility to occupational fraud, thereby minimizing the possibility that you will be part of those statistics in the future. The first step in effectively doing this is to recognize some red flags. In that regard, many of the primary perpetrators of fraud in the above mentioned cases shared some of the following characteristics:

• Living beyond their means
• Experiencing personal financial difficulties
• Exhibiting control issues and being unwilling to share their duties
• Failing to take vacations
• Demonstrating irritability, suspiciousness or defensiveness regarding their activities
• Past employment related issues or complaints about their current employment
• Experiencing significant pressure from family problems, legal issues or addictions
• Possessing unusually close relationships with customers or vendors

While the existence of these characteristics certainly does not mean fraud is occurring, it is an indicator that your controls may need to be strengthened.

Simple Steps

External audits, internal audit departments and mandated detailed management reviews throughout an organization are some of the more effective tools in the battle against fraud. But there are also other low cost and minimal effort controls that can make a huge difference in discouraging fraud in the workplace. Some of these are as follows:

• Establish a hotline for personnel, customers and vendors to report suspicious activities
• Work with your HR provider to develop a formal Code of Conduct and anti-fraud policies
• Make job rotation and vacations mandatory within the organization, and do not allow employees to come to the office during their vacations.
• Offer rewards for tips that help identify and prosecute fraudsters within the company
• Limit computer and network access to only those areas an employee requires to do their job
• Seek to segregate duties by minimizing the possibility of employees having access to assets and accounting records

and last, but certainly not least,

Set a positive tone at the top by leading by example and sending the message that even the slightest fraud will not be tolerated. Investigate every case of fraud and seek to punish any perpetrators, because letting your employees know you are aware of the possibility of fraud is often the biggest deterrent against becoming a victim.

About the Author
Heather L. Brown, CPA, CFE, is an audit manager with Kingery & Crouse, P.A., Certified Public Accountants, located in Tampa, Florida. During her 16 year tenure in public accounting, Heather has served a wide variety of clients, both public and private. Kingery & Crouse, P.A. is a full service public accounting firm with a staff of dedicated professionals providing audit (including SEC and employee benefit plan audits), tax and accounting services. You may contact Kingery & Crouse at (813) 874-1280 or find us on the web @ www.tampacpa.com.