Fraud. It Can Be Such a Scary Word.

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In working with many small and medium-sized business, I’ve found that people generally don’t like to talk about fraud. Some people are afraid their business will be susceptible to fraud and, therefore, they are paranoid to talk about it.

In working withmany small and medium-sized business, I’ve found that people generally don’t like to talk about fraud. Some people are afraid their business will be susceptible to fraud and, therefore, they are paranoid to talk about it. Others, especially here in Iowa, have a high level of trust with their employees and believe it would never happen in their business. The fact is, we should all be talking about fraud to protect our businesses.

The Association of Certified Fraud Examiners 2018 Report to the Nations: Global Study on Occupational Fraud and Abuse cites some staggering statistics regarding fraud.

 

Companies with less than 100 employees represent 28% of fraud cases and median losses are $200,000.

 

Private companies represent 42% of fraud cases and median losses are $164,000.

 

Long-term employees stole twice as much as short-term employees.

 

53% of victims in fraud cases recovered nothing.

 

With the number of cases being significant and losses being substantial in small businesses, all business owners and managers should be taking steps to prevent fraud in their business.

Businesses with less than 100 employees also face different risks for fraud to occur in their organization. Corruption is the most common in small businesses. 70% of corruption cases are perpetrated by someone in a position of authority and 50% of the cases were detected by a tip. A code of conduct displaying an ethical tone at the top and a whistleblower hotline can be key detection methods in a corruption case.

The other risks related to small business can be tied back to how strong the internal controls of the organization are. The internal controls are the checks and balances implemented within the organizational processes that ensure no one has the complete control of a process. In small organizations, this can be difficult due to a limited number of associates. Often the owner or key manager is needed to provide adequate segregation of duties. Internal control weaknesses are responsible for nearly half of all frauds and the lack of internal controls is the primary control weakness that contributes to occupational fraud. In small businesses, it is very important for the owner or key manager to be reviewing monthly financial statements and bank statements. They should ask questions for anything that looks out of the ordinary and review the supporting documentation to ensure the transaction has been properly recorded and relates to the business.

Fraud can be detected and losses mitigated by knowing the red flags of fraud. In 85% of cases, fraudsters displayed at least one behavioral red flag and in 50% of cases they exhibited multiple red flags. Red flags can vary by position and by gender but it’s important to know your employees’ behaviors, which behaviors might present greater risk, and question any unusual changes in behavior. The fraud perpetrators can also participate in misconduct other than the fraud such as bullying or intimidation, excessive absenteeism, or poor performance evaluations.

If all these statistics have you worried and you’re ready to talk about fraud, we can help ease your concerns. Here are some ways we can help.

  • Tips are by far the most common method of initial detection with over half of the tips coming from employees and nearly one-third from outside parties. In addition, fraud losses were 50% smaller at organizations with hotlines than those without. We partner with Red Flag Reporting (remove the red hightlight once linked to URL) to offer your organization hotline services. Tips can be reported by phone and online and can be done completely anonymously. Through working with us, we can assist you if any investigation is needed after a tip is reported.

 

  • The risks that posed that greatest threats to organizations include inability to effectively identify or address known fraud risks and the lack of effective checks and balances. We can help you perform a fraud prevention checklist to determine risks to your business. We can also assist in designing internal control processes that will prevent and detect fraud but could also lead to efficiency in the processes in your business.

  • If you suspect fraud in your business, we can help you investigate the fraud to determine the extent of the losses. The median losses in each industry can be substantial to any business and statistics show that over half of victims recover nothing. We can work with legal counsel to provide litigation support and expert witness testimony.

While talking about fraud can be scary, the consequences for not preparing can be even scarier. Let us help you put a plan in place to protect your business.

 

Kathi Koenig, CPA
Partner – McGowen Hurst Clark Smith
p. 515.288.3279
e. KKoenig@mhcscpa.com

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A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen Hurst Clark Smith (MHCS) celebrates 70 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and financial planning expertise.

Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.

MHCS is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHCS feels is vital in today’s business environment.

For more information about our firm, please visit our website or check us out on Facebook.

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