November 20, 2014

Fraud Prevention: 10 Reasons Why All Businesses Need Safeguards

Everyone knows that occupational fraud is bad for business. It’s now common knowledge that the average organization loses 5% of its revenues annually to fraud.

But the 2014 Report to the Nations on Occupational Fraud and Abuse and other pertinent research shows that there are lots of other reasons why fraud prevention is so important today. Here’s what businesses need to know:

Many fraud schemes are never detected or last years before they’re caught. The longer a fraud lasts, the more financial damage they cause, according to the Association of Certified Fraud Examiners (ACFE).

The businesses that are most vulnerable (small businesses) lose the most money. They tend to have the least anti-fraud controls and suffer disproportionately large losses as a result. 

Simple safeguards work. A tips hotline is the best way (over 40%) to detect occupational fraud schemes, and it’s one of the top 5 Fraud Tips recommended by ACFE, organizers of International Fraud Awareness Week, Nov. 16-22. Other cost effective strategies: an anti-fraud policy and formal management review procedures.

A lack of safeguards may contribute to some employees becoming fraudsters. In a post on, physical security expert Marc Weber Tobias explained that a lack of controls, being able to override existing controls, a lack of high-level review, and a poor corporate tone set by owners and management, all contribute to workers becoming fraudsters.

Anyone can turn. The 2014 Report to the Nations study showed that owner/executives accounted for 19% of all cases and caused a median loss of $500,000; employees committed 42% of occupational frauds and caused a median loss of $75,000; managers committed 36% of frauds and a median loss of $130,000.

Most fraudsters work for their employers for years before they begin to steal. That means trust is established – and broken for some reason by the employee. On-going employee monitoring and an understanding of the risk factors and warning signs of fraud are important.

Occupational fraudsters are easier to spot than you think. In 92% of cases they exhibit at least one common behavioral red flag. The warning signs include living beyond their means and having unusually close relationships with vendors or customers.   

You never know when staff morale is going to plummet. Employees that are worried about their jobs or unhappy for other reasons are more likely to consider fraudulent behavior, according to the ACFE study of the Impact of an Economic Recession done during the 2008 recession. About half of respondents cited increased financial pressure as the biggest factor contributing to the increase in fraud.

Here is a Fraud Prevention Checklist:

  • Create a culture of security from the top down. Communicate security awareness and anti-fraud policies regularly.
  • Be pro-active about fraud detection with a third party hotline, surprise fraud audits, and continuous auditing software. The ACFE reports that proactive measures catch fraud sooner and minimize losses.
  • Schedule on-going anti-fraud training for employees.
  • Provide an employee assistance program for workers struggling with financial problems and other personal issues.
  • Implement other anti-fraud controls such as background checks during the hiring process, physical safeguards such as secure document disposal, and mandatory job rotations.

Information security is an important safeguard against fraud. This infographic provides more facts.