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This article was originally posted on The Province.
March is Fraud Awareness Month and with that in mind, The Province, along with accounting firm MNP, commissioned a poll to determine the risk and prevalence of fraud in B.C. Carried out by the market research firm Mustel Group, the survey got responses from 400 individuals and 200 businesses from across B.C. In today’s second of three parts, we’ll examine how likely businesses feel the threat of being defrauded is and the value of whistleblowers in uncovering fraud. The series wraps up on Wednesday with a look at small businesses that have been defrauded and the results of a survey of more than 500 businesses, commissioned by the Canadian Federation of Independent Business.
B.C. businesses are confident to the point of being smug that they won’t be the target of fraud.
Which is odd because one-third of business respondents to a Province/MNP poll said they have, in fact, been the victim of fraud.
Yet 85 per cent of the 200 businesses polled by The Province/MNP said they felt the risk of fraud to their business was low.
In the same survey, when individuals were asked to rate the risk of personal fraud low, medium or high, 44 per cent, roughly half that of businesses, responded they felt the risk was low.
“What I find so interesting is the incidence of businesses being defrauded is high (33 per cent), yet 85 per cent of businesses feel the risk of them being a victim of fraud is low,” said Evi Mustel, co-owner if the market research firm, The Mustel Group, that carried out the survey.
A similar, but global, poll conducted a little over a year ago by the 70,000-member Association of Certified Fraud Examiners (called the Report to the Nations on Occupational Fraud and Abuse) discovered the median loss due to fraud is $140,000 and that a fraud will last a median of 18 months before being detected.
Respondents to the ACFE survey estimated they lost five per cent of annual revenue to fraud, with asset misappropriation schemes the runaway most-common type (87 per cent of cases reported).
On the other hand, while financial-statement frauds accounted for only eight per cent of business frauds in the ACFE study, their median loss was $1 million.
“Businesses are going to be bigger targets of fraud than individuals because there is more money to get out of a business,” Pat McParland, a forensic accountant with MNP, said.
Of note, a quarter of frauds in the Mustel Group poll were brought to light through whistle blowers or tips from someone like a bank or supplier.
Yet only seven per cent of responding businesses said they have installed a whistleblower hotline.
“In a number of (MNP) cases, a tip has proven to be the tip of the iceberg,” McParland said.
In one case, when MNP uncovered $15,000 missing from a particular fundraising venture of a non-profit organization, it led to discovery of a further theft of $35,000 by the same accounting clerk.
The clerk repaid the money and was fired for cause. A police complaint was filed, but no charges laid.
In another instance, during an investigation into one employee’s alleged misconduct at work, MNP identified another employee who spent most of the work day gambling and watching porn online.
Both employees were fired for cause.
Then there was the whistleblower that reported a manager who was sending confidential corporate information to a competitor from an office computer.
Once again, it led to a dismissal for cause, as well as a civil suit.
But these examples bring up another discovery of the Province/MNP poll: Fraudsters, even when they are identified, are often not brought to justice.
In some cases, that’s because a booze, drug or gambling addiction was behind the fraud so counselling coupled with moving the individual to another part of the organization was the course taken.
But still, 38 per cent of identified perpetrators faced no consequences, the same percentage that wound up being fired.
“That’s interesting,” Mustel said. “I think partly that is because unless you are 100-per-cent sure, unless you have concrete evidence, you are left defenceless to some degree.”
There was one more sobering fact unearthed by the Province/MNP study.
“As for recovery of damages, 52 per cent of businesses said they got none,” McParland said.
Barely one in four business — 28 per cent — said they got all their losses back.
BY THE NUMBERS
Percentage of businesses that feel risk of fraud is:
Percentage that have had fraud occur at their business: 33
Percentage of business frauds that were $50,000 or less: 94
Percentage of businesses that recovered all fraudulent damages: 28
None at all: 52
Don’t Know/still in progress: 6
Were the perpetrators identified Y/N: 50/50
Percentage of inside jobs: 50
Percentage of identified perpetrators who wound up fired: 38
Faced no consequences: 38
How fraud was discovered:
Internal audit: 22
Bank or supplier tip: 12
Percentage of businesses that have fraud prevention and detection measures in place: 63
Reconciliation and other accounting controls: 74
IT controls such as passwords: 71
Job descriptions and other administrative controls: 66
Physical access controls: 51
Ethics and fraud policies: 33
Staff training to I.D. suspicious activity: 8
Whistleblower hotline: 7
FIVE STEPS TO REDUCE EXPOSURE TO FRAUD
1. Environment: create an ethical environment (the tone is set at the top) by implementing appropriate policies and procedures, such as:
a. Ethics and anti-fraud/anti-corruption (with annual sign-offs).
b. Whistleblower (with hotline)
c. Conflicts of interest.
2. Risks: identify fraud risks to the business (specific threats, likelihood and impact) as part of regular fraud-risk assessments.
3. Controls: implement basic internal controls, such as:
a. Accounting reconciliations, analysis and authorizations.
b. Job descriptions with segregation of duties (for example, separate control of assets from recording and reporting).
c. Physical and IT security.
4. People: know the people inside the business (employees, management, officers and directors) and outside (suppliers, creditors, customers):
a. Proper hiring practices (background and reference checks).
b. Credit checks.
c. Audit clauses for suppliers/contractors.
d. Adherence to business ethics for suppliers.
e. Identify and watch for personal red flags (i.e. employees living beyond means, defensive attitude; suppliers with close relationship to an employee, no street address only a mailbox; customer close relationship with employee, same address as employee, frequent returns/voids; general lack of proper documentation, vague explanations, documents appear altered or contain spelling mistakes).
f. Educate people about fraud through training.
g. Maintain appropriate employee support programs.
5. Monitoring: monitor the control environment and react to changes
— Source: MNP
FIVE STEPS TO RESOLUTION
1. Don’t panic: follow the fraud policy (if there is one) and maintain confidentiality.
2. Gather and secure basic evidence.
3. Contact legal counsel and/or police.
4. Repeat steps 2 and 3, contacting other advisers (i.e. forensic accountants, IT, private eye).
5. Consider options in consultation with legal, HR and financial advisers (where applicable), including:
a. Discipline, suspend or terminate employee.
b. Claim fidelity insurance (recovery of loss and costs).
c. Civil lawsuit (recovery of loss and costs).
d. Criminal charges (restitution order)
e. Do nothing (consider cost/benefit and potential impact if there is a next time).
— Source: MNP
Categories:Valuation, Forensics and Litigation Support
Related Topics:Fraud; Studies
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