Could your Organization Fall Victim to Fraud?

Did you know that about 5% of all revenue earned by organizations in the United States is lost to fraud? That’s 5% of everyone’s hard work being siphoned off every year! The statistics are even worse for small businesses and nonprofits because they usually have fewer people and resources.


So exactly what is fraud? How can it happen, and how can it be prevented?


Fraud is an illicit act of deceit or mistrust to obtain money, or derive business or personal advantage. Fraud is perpetrated with intent to inflict suffering on another to achieve financial or other gain.


Frauds fall into three categories:


  1. Asset misappropriation represents the highest volume of fraud instances, but the lowest dollar amount. Examples include taking home office supplies and using a company vehicle for personal transportation.


  1. Financial statement manipulation represents the lowest volume and the highest dollar amount. This is due to the position and motives of the organization’s senior management. They have access to alter reported revenue and expense information.


  1. Corruption includes submitting fraudulent invoices from fictitious vendors and paying bribes. These frauds may also involve regulatory breaches, such as under the Foreign Corrupt Practices Act (FCPA).


Organizations that take these three actions reduce their chances of falling victim to fraud.


  1. Zero Tolerance – Communicate and train everyone in your organization that fraud and related activities will not be tolerated. Address the ramifications of engaging in fraud, such as termination and prosecution. Be prepared to take those actions, if necessary.


  1. Segregate Tasks – Assign transaction tasks in a way that makes it difficult for funds to be diverted from your bottom line. Examples include separating payment request and preparation from spending approvals and signing checks.


  1. Reconciliations/Independent Review – Someone who has no responsibility for initiating, preparing, or approving transactions must reconcile the books. Periodic reviews should be performed by someone who is independent of the transaction process, but familiar enough with the organization to identify inappropriate activity.


Avoid losing 5% in revenue to fraud by taking these three actions, and reduce the chance that your organization will fall victim to fraud. Your bottom line will thank you.