And The Results Are In... FRAUD DOES EXIST!

By: Ricky Longoria, CPA, CFE - Partner (Posted: 6/17/2013)

The Association of Certified Fraud Examiners has issued its annual report and survey titled “Report to the Nations on Fraud and Abuse”. The report confirms that fraud continues to exist at all levels and that the typical organization loses 5% of its revenues to fraud annually. It was also reported that, on average, most fraud schemes lasted approximately 18 months before they were detected. Asset misappropriation schemes continue to be the most common type of fraud. These types of schemes include skimming and billing as well as schemes involving check tampering, and fraudulent expense reimbursements. There are a variety of other fraud schemes and new schemes are on the rise. Although most companies attempt to foster a culture of trust, the survey results reveal that most perpetrators are those with higher levels of authority, as well as those with the most seniority. In fact, fraud schemes involving larger dollar amounts involved employees with higher levels of authority.

Properly designed internal controls and oversight by owners are critical to minimizing the risk that significant fraud will occur. An independent audit is a useful tool in the process but the study found that only 3% of all frauds were detected by such an audit. As the study stated “While external audits serve an important purpose and can have a strong preventive effect on potential fraud, their usefulness as a means of uncovering fraud is limited”. Depending on the size and sophistication of an organization an independent audit can be burdensome. However, fraud prevention need not be complicated nor expensive. The results of the survey indicate that one of the most effective and relatively inexpensive tools in identifying fraud is the ability to obtain information from those within the organization in the form of a tip. Tips can be facilitated by the implementation of anonymous fraud tip line or similar arrangement where those in the organization can freely report fraud without fear of involvement or retaliation.

Additional ideas on fraud prevention can be obtained by meeting with a Certified Public Accountant (CPA) who also is a Certified Fraud Examiner (CFE). A Certified Fraud Examiner brings real world experience and training to any engagement where the prevention, detection and prosecution of fraud matters are important. As mentioned above, because the typical organization loses 5% of revenues to fraud annually, engaging a Certified Fraud Examiner can pay for itself. Fraud engagements usually take the form of Agreed Upon Procedures that are tailored to address the particular concerns of a client. For example, Burton McCumber & Cortez, LLP has worked with clients to develop procedures related to fraud prevention through our uniquely developed PRIDE (Promoting Responsibility Integrity and Dedication to Ethics) employee training program. Other example procedures include those related to the identification of red flags, internal control reviews, surprise cash counts and risk assessments.

Fraud is something that most owners and managers do not believe exists in their organization. However, the results of the ACFE annual survey support the reality that fraud does exist and should be taken seriously. A complete copy of the ACFE of the 2012 report can be found by visiting www.acfe.com. We encourage you to contact Ricky Longoria, CPA, CFE or Ben Pena, CPA, CFE should you have any questions or concerns regarding fraud in your organization.