Unfortunately, fraud is a relevant topic for almost everyone and everything in today’s business environment. We all have likely heard about “Wall Street-size” corporate fraud, but if you are a business owner fraud should be more than something that happens to the big guys. The business’s employees, managers, and officers often perpetuate frauds against companies. In 2017, this type of fraud costs businesses an estimated $7 billing in total losses. Asset misappropriation by employees represents 90% of those losses.
What’s more, even with sophisticated accounting systems, and both external & internal audits, more than 50 percent of fraud is discovered by accident or through tips. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has developed a framework for corporate governance to combat corporate fraud which is used by most traded businesses and supported by professional organizations including the IMA, AICPA, and IIA. The COSO framework has five components, with Culture/Environment as the starting point.
Being proactive in your response to the threat of fraud is the most cost-effective way to protect your business. Establishing a healthy and honest corporate culture helps deter would-be fraudsters. Here are five tips any company can use:
1) In 2013, the Edelman Intellectual Property group conducted a worldwide survey and found that more than 80 percent of employees do not trust that their boss would tell the truth. Culture is a trickle-down economy. Top managers are responsible for setting an ethical tone and reinforcing it through example. It is essential for leaders within your firm to understand the culture you want for your business, communicate it, and lead by example.
2) Attracting and retaining the right people is the cornerstone. Employees with a high personal code of ethics bolster your corporate culture of honesty. To find that hidden gem, include as a requirement for the application process that all applicants certify that their application or resume is accurate. Invest in training your staff on how to conduct thoughtful interviews and verify information on resumes.
3) Communication on repeat is essential. Even if you’ve stacked your leadership and ranks with honest people, they need to hear you say it. Identify the appropriate values for your company, provide fraud awareness training, and tell employees what the consequences will be if they perpetrate a fraud. Communication is best through multiple and repeated avenues. A business should provide a written code of conduct, display posters, create videos, schedule reminder meetings, and formulate a consistent fraud training plan.
4) Creating a warm, fuzzy feeling can protect you. Employees who feel good about their work are less likely to perpetrate a fraud. Feelings from lack of recognition, workplace inequalities, low pay, lack of clear expectations, and unreasonable expectations influence would-be fraudsters as they consider rationality for stealing or skimming. By minimizing negative perceptions, you are also reducing the opportunity for rationalizing a crime.
5) Your reaction to fraud sends a message to employees. When fraud does occur, many businesses would prefer to sweep it under the rug and handle it quietly. These crimes often involve a person that is well-known and liked within the company and who is likely to be experiencing financial or family difficulties. It is difficult to make an example of someone in this situation, but leniency sends a message to the rest of your company that consequences could be minimal and that you don’t value their honesty and integrity.
For more information, talk to Abacus CPAs at 417-823-7171 or www.abacuscpas.com. Better Guidance. Smarter Decisions.
Matt Clark, CPA, CIA