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BGBC Partners: Fraud can happen anywhere without prevention measures

July 4, 2012
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Indiana Lawyer Commentary

By Howard I Gross, Steven W. Reed and Casey L. Higgs

A typical organization loses 5 percent of its annual revenue to fraud.

When a business owner or adviser ponders this finding from the Association of Certified Fraud Examiners’ (ACFE) 2012 Report to the Nations, one has to consider their own susceptibility to fraud. Initially, you convince yourself that you have a low risk for fraud because you operate a small business, employ trusted people (and know what they are doing) or the business has been operating for years. You believe “it can’t happen to me.”

You are wrong.

Small businesses historically have suffered disproportionately larger losses due to fraud than larger organizations. According to the 2012 ACFE report, the smallest organizations suffered the largest median losses. Further, nearly half of the victim organizations do not recover any of the fraud losses.

Billing and check tampering are the most common fraud schemes reported by the entities. A single individual in a smaller entity, such as the bookkeeper, many times performs the check writing and cash collection processes. Within larger entities, these duties are segregated, with a formal approval and authorization process in place. Small organizations typically lack the appropriate anti-fraud measures which leaves them especially vulnerable.

The likelihood of successful fraud prevention and detection at smaller organizations is relatively low due to:

The organization’s accounting firm performs a compilation or review and not a financial statement audit;

The belief that a fraud risk-management program is costly to implement;

The belief that a substantial increase in resources is necessary to deploy proper internal controls; and

Employees are family and/or close friends and there exists a relationship of trust.

An organization that receives a compilation or review and not an audit of the financial statements does not reap the benefits of having its operational processes and internal controls analyzed by auditors. Auditing standards require auditors to consider the risk of fraud when planning and performing audits, but this is not required in a compilation or review. While audits are beneficial for assessing internal controls, the ACFE report stresses that external audits should not be relied upon as a business’s primary fraud-detection method. In the survey, audits only detected 3 percent of the frauds and ranked poorly in limiting losses.

Small businesses can implement cost- effective control measures such as:

Employee education and fraud awareness

Simple segregation of duties

Job rotation and mandatory vacation

A company code of conduct

Tip hotline

Management review

According to the ACFE report, hotlines are consistently the most effective fraud-detection method, but only 15 percent of small businesses have a hotline in place. Enacting hotlines, as well as all of the other inexpensive anti-fraud measures discussed above, can help business owners prevent fraud.

The belief that more resources are required to develop and implement proper internal control procedures also is misleading. An organization does not necessarily need to hire additional resources. A shift in roles, fraud training, and a proper segregation of duties can occur in organizations as small as three employees.

Lastly, businesses often employ family members and close friends, and there exists a relationship of trust. These businesses generally have very few controls in place, if any at all, because they rely on and trust those individuals. We recently encountered a fraud of this kind. A veteran employee of a small professional practice who was a longtime family friend allegedly misappropriated more than $100,000 in cash receipts over the course of four years. This particular employee was trusted by the owners and the perpetrator’s duties were not questioned nor were there proper controls in place to prevent or detect the ongoing fraud. Further, this person, like 87 percent of all perpetrators, was a first-time offender with a clean employment history.

The presence of anti-fraud controls significantly decreases the cost and duration of fraud schemes. According the ACFE report, organizations that had implemented any of the most common anti-fraud controls experienced lower losses and a shorter time to detection than organizations without controls.

Fraud can happen, especially in small businesses. The risk of fraud affecting your client increases without proper anti-fraud measures and controls. The first step of successful fraud prevention and detection is to acknowledge and be aware that fraud can occur. A seasoned forensic team can assist in evaluating your situation before it is too late.•

__________

Howard I Gross, CPA/ABV/CFF, CFP; Steven W. Reed, CPA/ABV; and Casey L. Higgs, CPA/CFF, CFE, CVA are with BGBC Partners, LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the authors.

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  1. On a related note, I offered the ICLU my cases against the BLE repeatedly, and sought their amici aid repeatedly as well. Crickets. Usually not even a response. I am guessing they do not do allegations of anti-Christian bias? No matter how glaring? I have posted on other links the amicus brief that did get filed (search this ezine, e.g., Kansas attorney), read the Thomas More Society brief to note what the ACLU ran from like vampires from garlic. An Examiner pledged to advance diversity and inclusion came right out on the record and demanded that I choose Man's law or God's law. I wonder, had I been asked to swear off Allah ... what result then, ICLU? Had I been found of bad character and fitness for advocating sexual deviance, what result then ICLU? Had I been lifetime banned for posting left of center statements denigrating the US Constitution, what result ICLU? Hey, we all know don't we? Rather Biased.

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  3. This law is troubling in two respects: First, why wasn't the law reviewed "with the intention of getting all the facts surrounding the legislation and its actual impact on the marketplace" BEFORE it was passed and signed? Seems a bit backwards to me (even acknowledging that this is the Indiana state legislature we're talking about. Second, what is it with the laws in this state that seem to create artificial monopolies in various industries? Besides this one, the other law that comes to mind is the legislation that governed the granting of licenses to firms that wanted to set up craft distilleries. The licensing was limited to only those entities that were already in the craft beer brewing business. Republicans in this state talk a big game when it comes to being "business friendly". They're friendly alright . . . to certain businesses.

  4. Gretchen, Asia, Roberto, Tonia, Shannon, Cheri, Nicholas, Sondra, Carey, Laura ... my heart breaks for you, reaching out in a forum in which you are ignored by a professional suffering through both compassion fatigue and the love of filthy lucre. Most if not all of you seek a warm blooded Hoosier attorney unafraid to take on the government and plead that government officials have acted unconstitutionally to try to save a family and/or rescue children in need and/or press individual rights against the Leviathan state. I know an attorney from Kansas who has taken such cases across the country, arguing before half of the federal courts of appeal and presenting cases to the US S.Ct. numerous times seeking cert. Unfortunately, due to his zeal for the constitutional rights of peasants and willingness to confront powerful government bureaucrats seemingly violating the same ... he was denied character and fitness certification to join the Indiana bar, even after he was cleared to sit for, and passed, both the bar exam and ethics exam. And was even admitted to the Indiana federal bar! NOW KNOW THIS .... you will face headwinds and difficulties in locating a zealously motivated Hoosier attorney to face off against powerful government agents who violate the constitution, for those who do so tend to end up as marginalized as Paul Odgen, who was driven from the profession. So beware, many are mere expensive lapdogs, the kind of breed who will gladly take a large retainer, but then fail to press against the status quo and powers that be when told to heel to. It is a common belief among some in Indiana that those attorneys who truly fight the power and rigorously confront corruption often end up, actually or metaphorically, in real life or at least as to their careers, as dead as the late, great Gary Welch. All of that said, I wish you the very best in finding a Hoosier attorney with a fighting spirit to press your rights as far as you can, for you do have rights against government actors, no matter what said actors may tell you otherwise. Attorneys outside the elitist camp are often better fighters that those owing the powers that be for their salaries, corner offices and end of year bonuses. So do not be afraid to retain a green horn or unconnected lawyer, many of them are fine men and woman who are yet untainted by the "unique" Hoosier system.

  5. I am not the John below. He is a journalist and talk show host who knows me through my years working in Kansas government. I did no ask John to post the note below ...

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