Protect Your Business from Fraud

Anna Sanchez, CPA, CFE and William Killory, CPA, Member (Aug, 2016)

Fraud can strike any business - large, small, new, or old. It does not discriminate and although it is rare, it seems to occur more often lately.  In the last six months, has reported on over 10 embezzlement cases in the area ranging from just over $20,000 to close to a million dollars. Although it is impossible to eliminate fraud risks, there are steps a business can take to avoid becoming the next local fraud victim.

The most detrimental mindset for a business is “it won’t happen to me.” Frank Abagnale, a former check forger and impostor who inspired the movie Catch Me If You Can, put it well: “If you believe you have a foolproof system, you’ve failed to take into consideration the creativity of fools.” In most instances we’ve been called in to examine, the fraudster was a long-term employee and even a friend of the owner, with access to accounting and banking functions. No one was reviewing their work closely or looking at banking activity and some schemes went undetected for up to 10 years.

The Association of Certified Fraud Examiner’s (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse estimated that five percent of annual revenues are lost to fraud. Recovering after fraud gets expensive, fast. Consider what it would cost you to hire an attorney and forensic CPA to investigate and uncover the extent of the loss, the physical energy spent and man-hours devoted to digging through records (if they even still exist).  Consider the time spent going after the perpetrator who likely spent the money at the casino or on a lavish lifestyle.  Then you will have the headache of proving your loss to the insurance company and possibly the law enforcement aspects of the whole affair. This is a case where an ounce of prevention is worth a pound of cure.

The good news is it is easier to prevent fraud than it is to detect an ongoing scheme. You may have heard the term “internal controls”- they are a process for assuring achievement of objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations, and policies. Fraud deterrence and detection is more than just internal controls, it is the perception of detection that is the control.  Those who believe their illegal activity will be detected are less likely to engage in it. One of the best things you can do to protect yourself is review bank activity online on a frequent basis. Look for unusual activity or items which appear unfamiliar and ask for original, supporting documentation. If something appears unusual, it merits a closer look.

Another method of prevention is to separate accounting duties so that an individual does not have the ability to authorize the use of and access to funds, falsify and alter accounting records, and reconcile bank statements to conceal an embezzlement. An accountant can be consulted to help you review the internal controls system for any exposure and recommend further prevention.

In each instance of fraud we have examined, the company either had no insurance or insufficient coverage for the losses. $10,000 of coverage is not enough to cover professional fees for the lawyer and forensic CPA alone. It is important to have insurance and, if you do, review your coverage to ensure it covers instances of fraud, for a sufficient dollar amount, and will provide for a reasonable amount to cover the cost of investigation. Consider how much exposure you have on a daily, monthly, and annual basis- if that money went missing, what would you need to continue operating?

The Institute of Internal Auditors has a periodical called “The Tone at the Top.”  That message for good or ill can permeate an organization.  Doing things the right way and staying on top of your organization and encouraging open communication will go a long way to identify problem areas and help in creating a work environment that will lessen the likelihood of fraud occurring.  As always, Our Certified Fraud Examiner and Tax Advisors at Dermody, Burke & Brown are available to further discuss any fraud questions you may have.


The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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