Financial Foundations: The Thief Within

Article, Kansas City Small Business JournalJuly 2009

Insurance / Legal / Forensic Investigation

Strategies in detecting and preventing fraud in the workplace can lower your risk of being a victim says Randy Wilson from our St. Louis office.

In any economic climate, small business owners have every reason to be concerned about fraud and embezzlement. Misappropriation and other forms of fraud have feasted on the bottom line of businesses forever—or at least since the dawn of motive, opportunity and rationale. While all three elements are important to the understanding and prevention of fraud, none is more important than opportunity, as it can be managed and controlled to deter, detect and thereby reduce the incidence of fraud.
According to its 2008 Report to the Nation, the Association of Certified Fraud Examiners (ACFE) estimated that organizations in the United States lost a staggering 7 percent of every dollar in revenue to occupational fraud. This equates to nearly $1 trillion per year.

Typical Fraudster

The fraudster in your midst may not be who you think.

Typical fraudsters disguise their motives through such techniques as being friendly, hardworking, prompt and knowledgeable of their job duties and the operations of the business. They also present themselves as being staunch supporters of the company’s mission.

It is all part of the con. Of course, this does not mean that all employees who possess these qualities are fraudsters, but it does mean that business owners and managers must be on constant guard if they wish to detect and prevent fraud. Employees with a motive and rationale to commit fraud need only the opportunity.

Fraud Detection and Prevention 

Unfortunately, the majority of small businesses do not perform the simplest of controls, such as reviewing monthly bank statements and payees of issued checks. Coupled with methods to conceal, opportunity allows misappropriation to continue undetected for long periods of time—sometimes years—with devastating and often unrecoverable financial results for the business. Yet, once these schemes are discovered, they often are found to be surprisingly simple.

Effective fraud detection and prevention programs are based on tenacity and attitude. Companies that make fraud prevention a part of their culture more effectively deter those with motive and rationale. Making it clear to employees that fraud will not be tolerated, that fraudsters will be prosecuted and that steps are being taken to discover and prevent fraud, provides an environment more difficult for the fraudster to operate.

The best systems of fraud prevention have as their foundation an understanding of how occupational fraud is typically discovered. According to the ACFE 2008 Report to the Nation, fraud is most often detected through the following:

  • Tip from employees, vendors, etc. 46% 
  • Internal controls 23% 
  • By accident 20% 
  • Internal audit 19% 
  • External audit 9% 
  • Notification by police 3% 

The total exceeds 100 percent because some frauds are detected in multiple ways.

Establishing an anonymous fraud hotline can immediately improve the probability for detecting existing schemes. The hotline must be available to all employees, and a reward for the identification and conviction of fraudsters makes the hotline even more effective. When coupled with internal audit and properly designed internal controls, your odds of preventing fraud and misappropriation dramatically improve with a hotline.
Specific techniques for improving any system of fraud prevention should include surprise audits, job rotation and mandatory vacations. These have proven to be effective methods, but are the least used by companies in preventing fraud. Not every small company can afford to have an internal audit department or retain an expert to assist in the design of an effective system of checks and balances, but all companies can benefit from more financial controls.

Electronic Detection and Prevention

Electronic analysis of financial computer data can provide a cost-effective way to greatly improve your system of fraud detection and prevention. Technology tools can predict the occurrence of numbers in a data range, such as the first number in the dollar amount of a disbursement check. The probability of occurrence is based on empirical data studies. For example, the occurrence of the number four in excessive quantity might signal the circumvention of dual signature controls on checks in excess of $5,000.
Periodic forensic computer testing of the system may be a valuable component of your fraud detection and prevention system.

Fraudulent Vendors and Outside Threats

It is important to consider the threat that dishonest vendors and suppliers–including those who may have been fictitiously set up by employees–pose to the assets and financial accounts of your business.

In addition, fraudsters are constantly designing ways to divert funds from your accounts. An excellent way to deter this activity is to initiate “positive pay” with your bank for all disbursements. This technique requires that the bank verify the check number and amount before clearing payment. Another deterrent is to move funds electronically through wire transfers and confirmations.


Occupational fraud is a serious problem in the United States, costing organizations an estimated $1 trillion a year. Effective systems of detection and prevention coupled with an attitude and tenacity for fighting fraud and misappropriation will lower your risk of being a victim.


As appeared in the Kansas City Small Business Journal, July 2009.

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