• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to secondary sidebar
  • Skip to footer

Scale FinanceScale Finance Logo, Interim CFO, Part Time CFO Services, Accounting Support, Temporary CFO, Accounting Bookkeeping Services

Interim CFO, Part Time CFO Services, Accounting Support, Temporary CFO, Accounting Bookkeeping Services

Charlotte · Raleigh – Durham · Chapel Hill · Triad · Southern Pines · Coastal Carolina
Closing the GAAP to Scale Your Business
The FINACA Logo
919-230-4667
Scale Finance, LLC, Financing, North Myrtle Beach, SC
  • Home
  • Services
    • CFO & Controller Services
    • Capital Raise Services
    • Business Valuations
    • Mergers & Acquisitions
    • Professional Consultations at No Cost
  • Professionals
    • Partners
    • Charlotte Team
    • Raleigh – Durham – Chapel Hill Team
    • Greensboro-Southern Pines
    • Coastal Carolina Team
  • Client Experience
    • Closed Capital Raise Transactions
    • Closed M&A Transactions
    • Client Endorsements
    • Information Technology
    • Healthcare, Biopharma & Medical Device
    • Services, Energy, Industrial
    • Consumer, Retail, Media
    • Real Estate
    • Private Equity Groups
  • Recent News
  • Knowledge Bank
    • Best Practices in Scaling Companies
    • Entrepreneurial Management Skill- Building
    • Financial Management
    • Mergers & Acquisitions
    • Regulatory Developments
    • Venture Capital
  • Contact Us
    • Charlotte
    • Raleigh – Durham – Chapel Hill
    • Triad – Southern Pines
    • Coastal Carolina
  • Joining Our Firm

Accounting Fraud – Common Causes and How to Stop It

Would you leave the front door unlocked to your business or not-for-profit organization? Of course not. That would give thieves easy access to your assets. Yet a surprising number of organizations don’t have strong antifraud controls in place to protect against dishonest people inside their organizations. And theft from insiders — also referred to as “occupational fraud” — can be costly.

Fraud losses vary significantly, depending on the nature of the scam and how soon it’s detected. Globally, the median loss is $130,000, according to the findings from the 2018 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE). Here’s a closer look at who was affected and how much was lost, as reported in the latest version of this biennial study.

Victim Organizations

Fraud can strike any organization regardless of the nature of its operations or its size. A recent ACFE study included 2,690 fraud cases occurring during an 18-month period.

While the news media focuses on high profile fraud incidents involving public companies, the median loss for those companies was only $117,000. Private companies suffered far greater losses — their median loss was a whopping $164,000. By comparison, the median losses for government and not-for-profit entities were approximately $118,000 and $75,000, respectively.

In addition, there are subtle distinctions between the types of fraud schemes that strike small and large organizations.

Top 5 Fraud Schemes by Size

Rank                       < 100 Employees                                    100+ Employees

1                               Corruption (32%)                                    Corruption (43%)

2                              Billing (29%)                                           Non-cash schemes (22%)

3                              Check tampering (22%)                          Billing (18%)

4                              Expense reimbursement (21%)               Cash on hand (14%)

5                              Skimming and cash on hand (20%)        Expense reimbursement (11%)

 

To Catch a Thief

Small and large organizations also differ in how they catch fraudsters. Tips were the detection method in 29% of the cases involving small entities, compared to 44% of the cases involving large ones. This could result from the prevalence of reporting hotlines, which are more common among larger companies than small ones with limited resources.

Overall, tips are the most common way fraud is initially detected. But it’s important to remember that outside stakeholders can also provide tips on unethical behavior. In the 2018 study, 21% of tips came from customers and 9% came from vendors. So, it’s important to educate your supply chain partners about any reporting mechanisms you set up.

Internal Controls

Beyond tips, a robust system of internal controls can help detect and prevent fraud. The latest study found that 15% of frauds were detected by internal audit procedures and 13% by management review.

What are the critical elements of an internal control system? In terms of lowering fraud losses, the most effective internal controls in the 2018 study were:

Form of Control (Percent Reduction in Fraud Loss)

Code of conduct – 56%

Proactive data monitoring and analysis – 52%

Surprise audits – 51%

External audits – 50%

Management review – 50%

Hotline – 50%

 

On the flip side, weak internal controls often provide dishonest people with the opportunity to steal assets or “cook the books.” In the 2018 study, a lack of internal controls and the ability to override internal controls were cited as the leading factors that contributed to fraud. Together, these factors were present in nearly half of the fraud cases in the latest study.

In addition, the 2018 ACFE study inquired about the types of antifraud controls fraud victims had implemented. The report revealed that 25% of frauds at larger organizations were caused by a lack of internal controls. In contrast, 42% of frauds at small organizations stemmed from weak controls. This finding helps explain why fraud seems to hit smaller organizations harder than larger ones.

Lessons Learned

Over the last two decades, the ACFE’s fraud report has taught important lessons including: No organization is immune to white collar crime. Driven by this report and recent high-profile public fraud cases, companies have increasingly implemented antifraud controls in recent years.

How do your internal controls measure up? Although strong internal controls don’t guarantee that fraud won’t occur at your organization, they can minimize your losses. Your auditor or accountant can help evaluate your internal controls and recommend areas of improvement. He or she can also investigate suspicious behaviors and anomalies for signs of white collar crime.

How to Fight Fraud Head-On

Honest employees are an organization’s first line of defense against white collar crime. Here are some ways you can encourage employees to join in the fight:

  • Invest in training. Educate staff on the red flags associated with fraud from within and outside the organization. This helps detect and prevent fraud. It also sends a powerful message about your intention to fight fraud no matter where it originates. Employees must perceive a high probability that fraudulent activity will be detected. The perception of detection is often sufficient enough to dissuade those inclined toward unethical behavior.
  • Engage management in the fight. Managers must be seen and heard reviewing controls and urgently correcting weaknesses that might be detected. If your organization’s managers are perceived to be unwilling or unable to review the controls, they may inadvertently be sending a message that it’s safe to commit fraud.
  • Set up a hotline. Anonymous fraud reporting hotlines are an effective method of obtaining tips about unethical behavior. Unfortunately, many small organizations shy away from this option, because they see it as too expensive and difficult to administer. A number of providers offer hotlines designed with small organizations in mind. The cost per employee is minimal in relation to the fraud it can help to uncover and the losses avoided.

The 2018 Report to the Nations found that employers were much more likely to be tipped off if they offer reporting hotlines. The study found that tips led to the detection of fraud in 46% of the cases involving organizations with reporting hotlines, but only 30% of the cases involving organizations without hotlines.

Another interesting finding: More than half of complaints were submitted via email or an online form. This suggests that companies with telephone-only reporting hotlines should consider adding more technology-based channels for reporting fraud.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.

Primary Sidebar

Knowledge Bank

How to Handle a Bank’s Rejection of Your Loan Request

Accessing University IP – Negotiating Financial & Other Terms

Why VCs Sometimes Push Companies to Burn Cash Too Fast

7 Steps for New Business Owners

Basic Benefits of Starting a Business in North Carolina

Finance & Accounting 101 for New Small Company Owners

Accounting Fraud – Common Causes and How to Stop It

Why 80% of Court Judgments Go Uncollected

7 Steps for Early Stage Fundraising from a VC

Foreign Exchange Management Under Volatile Conditions

Lessons Learned from the EIDL / PPP Trenches

Cash Management Plan – 2020 Economic Crisis

Is Your CFO Any Good? 4 Point Checklist

What Happens When Deals Die

How to Handle a Bank’s Rejection of Your Loan Request

Susceptibility to Accounting Fraud for Medical Businesses

Bankruptcy Relief for Small Companies Coming Soon

New Rules for Overtime Pay take Effect January 2020

The 5 Worst Things You Can Say to a Venture Capitalist

Incentive Stock Options Versus Nonqualified Stock Options

Explore the Knowledge Bank…

Secondary Sidebar

Recent News

SF Client Impact Financial Systems (IFS) Acquired by iPipeline

Scale Finance Assists TrueLearn with Investment by LLR Partners

Scale Finance Assists Textum Weaving with Investment by Quad-C

Scale Finance Closes Debt Financing for Horizon Eye Care

Scale Finance Closes Acquisition of Horsepower Site Services by MCG Civil

Scale Finance Closes Growth Financing for Celerity

Scale Finance Advises on Acquisition of Reliant Transport

Scale Finance Closes $20 Million ABL Financing for TRA

SF Client TruPoint Partners Acquired by Ncontracts

Scale Finance Advises on Debt Financing for Alpha Waste Industries, Inc.

Scale Finance Closes $7M Senior Debt for Travel Resorts of America

Scale Finance Closes Acquisition of Raleigh Metal Recycling by Elite Waste Services

Scale Finance Advises on Debt Financing for Pediatric Advanced Therapy

Scale Finance Closes Growth Equity Investment for Better Car People LLC

Scale Finance Closes Sale of Cayden Security to SCE Group

SF Client EarthKind Secures Growth Investment

Scale Finance Advises AMTdirect on Strategic Growth Investment

More News…

Footer

Ask the CFO

Need a quick answer to a finance/accounting question?

Sending

Media

Scale Finance Managing Director Dave Gilroy interviewed on WSIC Radio (local Fox affiliate)

/wp-content/uploads/2014/02/David-Gilroy-Interview-Local-Biz-Now-2-7-14.mp3

Entrepreneurial Tips

  • Funding Tips from Scale Finance
  • CIE Life Sciences Panel Discussion
  • Why Use Fractional CFO Services

FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service.

FINACA is a nationwide network of independent finance and accounting consulting firms focused on delivering exceptional client service.

Sign Up—Finance Bulletin

Monthly insights into corporate finance for entrepreneurial companies

Sending

Return to top of page

Copyright © 2008–2021 Scale Finance, LLC
Securities and offering services through Charles Towne Securities, LLC. Members FINRA and SIPC.