Is Your Organization Susceptible to Fraud?

by Jim Marasco , CPA, CFE, CIA
Fraud Matters, Winter 2007

What industries are most victimized by fraud? 

The typical organization loses 5 percent of its annual revenues to occupational fraud, according to the Association of Certified Fraud Examiners 2006 Report to the Nation on Occupational Fraud and Abuse.

Some industries are more susceptible than others. Do you know how your organization fares?

Fraud affects individual industries in different ways. For example, the retail industry may experience a greater number of individual fraud occurrences, but the average loss may lag behind other industries.

The common denominator is that everyone is susceptible to fraud. How well your organization protects itself will prevent you from becoming another statistic.

The most susceptible industries

The banking and financial services industry is usually referenced as one of the most victimized industries. Frauds affecting this sector range from simple cash larcenies to sophisticated check tampering and kiting schemes. In the past few years, identity theft and credit card fraud have become increasingly popular as the Internet continues to develop and banking becomes more automated.

Because of its sheer size and number of employees, the government is extremely susceptible to fraud. As such, government agencies have fallen victim to nearly every type of fraud that exists. This includes billing fraud, the purchase of substandard/low-quality products, asset misappropriation and payroll/expense reimbursement fraud.

The manufacturing sector also carries a higher risk for fraud. The nature of this industry makes it susceptible to noncash frauds such as asset misappropriation, where employees steal goods and materials or intellectual property, such as trade secrets or technology.

Billing frauds are popular because of the various products used in assembly. Additionally, expense reimbursement fraud is also common because of the sales forces employed by these manufacturing companies.

If you operate within the retail sector of the economy, you’re familiar with fraud and its prevention measures. Inventory theft and cash larcenies are most prevalent. As mentioned previously, the number of occurrences easily eclipse other industries, but the average dollar amount is typically lower.

It would be remiss not to mention the healthcare industry as being vulnerable to fraud. The most common types include insurance fraud perpetrated by providers or billing scams employed by outside agencies. As our population ages, more dollars will be spent in this sector, making it an even more popular target.

Safeguards to mitigate your exposure

Each industry adopts internal controls that offer it the best protection against fraud and abuse. These safeguards may overlap industries or be totally unique to the sector itself.

The financial services industry has tightened its controls over the past few years by incorporating security numbers and photos on credit cards and enabling checking account verification at the registers for retailers to protect against taking bad checks.

The government uses thousands of internal auditors along with retaining outsourced assistance to audit its various departments and implement controls.

As manufacturers have become more automated, so have their internal controls. Types of controls include inventory management programs, installation of surveillance equipment in plants and loading docks, GPS tracking on delivery trucks and corporate charge card monitoring for business expenses.

Retailers use surveillance, inventory security tags, perpetual inventory systems and sophisticated point-of-sale systems to track purchases and returns to thwart perpetrators.

Insurance companies and Medicare/Medicaid have updated their claims auditing systems to spot suspected instances of fraud. Fraud hotlines and whistle-blowers have been highly successful in the healthcare industry. Some of the largest fraud settlements have resulted from whistle-blower actions.

Securing your company

Even with these controls, fraudulent activity still manages to permeate these safeguards. The best way to protect your organization is to have an internal control review performed on your operation.

Your current practices will be compared against peers in your industry. The goal is twofold – to protect and safeguard your company from being victimized and to improve your processes to obtain greater efficiencies and become more effective at each level of the organization.

If you suspect a fraud has occurred, don’t hesitate to call our firm. Specific protocol should be followed.

Our experts can help counsel you through this process. We can help you determine if a forensic review of your records is necessary and maximize your recovery if a fraud did occur.

In these types of situations, time is of the essence. Your chances of recovering what is lost are maximized by reacting quickly to the situation.

James I. Marasco, CPA/CFF, CFE, CIA
Jim is a partner at EFP Rotenberg. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFP Rotenberg affiliate company). Read more about Jim . Article republished with the permission of CPAmerica.