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How to Prevent Occupational Fraud in a Growing Business

Frank L. Varanavage, CPA, CFE Director, Audit & Accounting, Investment Industry Group

There are countless businesses in the market that have grown from a small handful of employees to large teams spanning multiple offices or locations. At some point during this transition, the owners had to relinquish some of their day-to-day operational responsibilities to new employees in order to facilitate the business's growth.

As these businesses continued to expand, their owners concentrated so much of their time on growth that they overlooked the need to modify or add controls that would help deter potential occupational fraud within the business. This oversight, while understandable in the pursuit of expansion, can create vulnerabilities within a business's internal processes. It is extremely important to address these gaps in order to maintain controls at the company.

Most businesses owners will say that their way of preventing fraud is to have an external audit conducted, but the fact of the matter is that while audits can and do uncover fraud, they are not foolproof. Fraudsters can and will go to great lengths to conceal their activities, and some fraud may not be detected through traditional audit procedures.

The Association of Certified Fraud Examiners’ (ACFE) 2022 Report to the Nations noted that having an external audit only helped with the detection of occupational fraud four percent of the time. In fact, it was reported that it is more likely for fraud to be uncovered by accident (five percent) than through an external audit.

To avoid making negative headlines, your business should continually review, modify, and institute new controls to combat any potential fraud.  

Here are five of the most successful factors that can help to detect and prevent fraud from happening in your business:

  1. Fraud Hotline. When it comes to fraud detection, this method has proven to be the most successful. In fact, it is almost three times more effective than the next method. The ACFE reported that more than half of all tips come from employees, and 42 percent of the time, frauds were detected by tips. Businesses with a hotline (email, web, or telephone-based) detect fraud more quickly and have lower losses (median loss $200,000 versus $100,000) than businesses without hotlines.
  2. Internal Audit. Despite the cost of maintaining, internal audits are a valuable tool for your business to ensure accountability, compliance, and operational excellence. Carefully plan and execute your internal audit programs to maximize the benefits and mitigate the disadvantages.
  3. Proactive Management Review. This is noted as the biggest control modification after a fraud has occurred and one of the weakest controls before a fraud has occurred. This is the process of having management review business controls, processes, accounts, and transactions for adherence to the business’s policies and procedures. This review should be a continuous process to adapt to the changes that come with the growth of your business.
  4. Document Examination. This process involves carefully examining physical and electronic documents to uncover inconsistencies, irregularities, or signs of manipulation that may indicate fraudulent behavior. A simple example of this would be reviewing a vendor invoice to determine which service or product was provided and to whom and where the payment was being made to.
  5. Account Reconciliation. Performing regular and timely reconciliations of bank accounts and accrual accounts can help identify discrepancies and irregularities promptly. These reconciliations should be prepared and reviewed by different employees to keep a segregation of duties. Any unusual items should be investigated and evaluated when necessary.

Unfortunately, fraud prevention is usually not taken as seriously until after a fraud has taken place. Business owners must understand that the most cost-effective way to limit fraud is to prevent it with a plan, take inventory of your controls, and modify, when necessary, before fraud can take place.

If you have any questions or would like to discuss how your organization can successfully implement the five fraud prevention factors above, please contact us.

Contact the Author

Frank L. Varanavage, CPA, CFE

Frank L. Varanavage, CPA, CFE

Director, Audit & Accounting, Investment Industry Group

Investment Industry Specialist

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