Fall 2006 issue of Horizons

Six Myths About Fraud

Organizations are more aware than ever about fraud and its consequences. However, 5 percent, or $650 billion, of corporate revenue is still lost to fraud each year. Following are six common misconceptions about fraud that continue to persist and, if not addressed, may leave your organization vulnerable to fraud.

Tom Zetlmeisl, CPA

Christina Solomon, CPA

Myth 1 “Our employees would not commit fraud.”

Fact: Even your most trusted employees may feel immense pressure to commit acts they never would consider under normal circumstances.

Myth 2 “One instance of fraud would not cause significant damage.”

Fact: It is easy to discount the impact one person's actions can have on your organization; however, the initial fraud and resulting “ripple effect” can be substantial. Almost two-thirds of fraudulent incidents are committed by a single person within an organization. Most people who start committing fraud will continue until the scheme is uncovered. What begins as a theft of an inconsequential amount can grow to hundreds of thousands of dollars in a short period of time. The median loss from occupational fraud is approximately $159,000, with one in three costing at least $500,000. If that isn't enough, the ripple effect may have a greater financial impact than the fraud itself. It is an expensive and time-con- suming task to uncover and attempt to quantify your losses as a result of fraud. It has been estimated that 40 percent of organizations do not recover any of their fraud losses. Those organizations that do, often recover less than one-fourth of the initial loss. Relying on insurance is not always sufficient, and fraud claims often lead to higher premiums. Furthermore, there may be irreparable harm to your organi- zation's reputation, and it may place your organization under undue financial strain.

Personal addictions, extravagant lifestyles, mounting medical bills or credit card debt could push an employee to commit

illegal acts. Employees with the incentive to commit fraud may do so if they can rationalize their actions and if they perceive they have the opportunity to get away with it. More than 80 percent of fraud perpetrators are classified as “employ- ees” or “managers.” The

median losses are approximately $78,000 and $218,000 per scheme for employees and managers, respectively. Frauds committed by members of an organization's key executives and owners are reported less often but can be more financial- ly devastating for your organization, with a median loss of $1 million per incident. In addition, there is a direct correlation between the length of time a perpetrator has been employed at an organization and the size of the fraud scheme. Tenured employees often have garnered the necessary trust from superiors and co-workers to commit and conceal fraudulent activities. Therefore, as we reward our employees with more authority and autonomy, we may also be unwittingly increasing their opportunity to com- mit extensive and financially significant fraud.

Myth 3 “We rely on our internal controls to detect fraud.”

Fact : Internal controls have inherent limitations.

Strong internal controls can have a significant impact on deterring fraud, and a well-designed control structure should

13 • summer 2006 issue