Fall 2006 issue of Horizons

be a priority in any comprehensive anti-fraud program. Organizations generally have implemented better internal controls in recent years and may rely on them to detect fraud. However, the number one method of detecting fraud is an anonymous tip, accounting for more than 30 percent of reported cases. Internal controls ranked fourth, behind fraud detected by “accident.” Moreover, the internal control environment at your organiza- tion may not be aligned to address the fraud risks that mat- ter most. Often management focuses on cash theft, invento- ry and expense reimbursement schemes and fails to consid- er more invasive issues, such as financial statement fraud or computer crime, which may have a more significant impact on your organization. Although asset misappropriation is the most prevalent type of fraud, accounting for more than 90 percent of reported cases, it has relatively low median loss- es associated with it ($150,000). Financial statement fraud, on the other hand, is the least reported type of fraud but has the highest median loss at $2 million per incident. Finally, those responsible for monitoring internal controls often are not adequately trained or experienced to notice the fraud warning signs when present.

In addition to losses sustained from theft of cash receipts and cash on hand, companies suffer significant losses asso- ciated with fraudulent cash disbursements. Examples of fraudulent cash disbursements may range from check tam- pering to credit card return schemes to fictitious vendor or employee schemes. Your organization can be affected by each of these schemes regardless of its size. Although fraud within large, publicly held companies is wide- ly publicized, it is reported that private companies suffer the largest median losses from fraud. Further, smaller, privately held companies (those with 100 or fewer employees) suffer disproportionately large losses due to fraud compared to the largest organizations. It is harder for the smaller companies to survive the median loss of almost $200,000 per incident.

Myth 4 “Fraud couldn't happen to us - we're not like those companies you hear about.”

Fact: Fraud can occur in any organization regardless of its size, location or annual revenue.

Fraud does not necessarily involve complex schemes or col- lusion among members of your key management team. Often fraud is not even carefully concealed and may “fall apart” once the scheme grows too large or time consuming to cover up. By enforcing “mandatory vacations” for its employees, an organization may uncover or deter fraudulent activity.

14 • summer 2006 issue