Position yourself for success: Simple steps to protect against fraud (Proceedings)

Fraud occurrences have increased during the past year, as have the dollars lost to fraud schemes, according to the 2009 Association of Certified Fraud Examiners' Occupational Fraud Study. During economic downturns, individuals feel a crunch with reduced income and increasing expenses. The average U.S. company loses 7% of its annual revenue to fraud, with the median fraud loss for all businesses at $175,000, and the median fraud loss for small businesses at $200,000. In fact, private companies have the highest incidence of fraud (39.1%), with public companies coming in at second (28.4%), according to the Association of Certified Fraud Examiners' (ACFE) 2008 Report to the Nation on Occupational Fraud and Abuse.

To reduce the occurrence of fraud in your practice, or to confirm your faith in your staff members and discourage the possibility of fraud, set up controls in your practice. Many of the suggestions that follow are not difficult; they just require dedication and execution on the part of management. Implementing controls will be worth your time, not only to recover stolen revenue, but to eliminate the temptation of staff members to commit fraud in the future.

Most occupational fraud is committed by a first-time offender, usually in a more senior position in the company, according to the ACFE report. What causes these trusted individuals to suddenly steal from their employer? Fraud examiners explain this phenomenon with the fraud triangle. The first leg is incentive and/or pressure to commit fraud. Perhaps the individual is having personal financial problems, fearing the loss of a job or a spouse's job, or fearing failure to meet expectations or goals at work or at home. Whatever the incentive, the reason for committing fraud exists in the individual's mind. The second leg of the fraud triangle is a perceived opportunity. If an individual needing additional sources of income sees an opportunity to acquire that income, albeit through illegal means, the likelihood is much greater that he or she will commit fraud. The final leg of the fraud triangle is rationalization. The staff member may feel that because he has taken on additional responsibility since downsizing occurred, without a pay increase, he's only taking what is rightly his. When these three conditions – incentive/pressure, perceived opportunity, and rationalization – are met, the likelihood that an individual will commit fraud greatly increases.

Since 88% of occupational fraud involves asset misappropriation, according to the ACFE report, it's important to know which of your assets are at risk. Cash is most commonly targeted, though inventory, accounts receivable and payable, and compensation expenses are not immune either. Keep your eyes open to warnings that fraud may be happening in your practice. According to the 2009 National Association of Certified Valuation Analysts and the Institute of Business Appraisers' "Valuation and Financial Forensics – Educate, Communicate, Preserve" presentation, these warnings can include employee behaviors such as complaints about compensation and personal finances, lifestyle changes (generally an improvement in lifestyle), being the first in the office and the last out of the office, and reluctance to share duties or take vacation time. While innocent in and of themselves, these behaviors can be indicative of suspicious activities. Other red flags can include missing documentation, excessive voids and/or credits, duplicate payments, lack of supporting documentation, and unusual entries at the end of the reporting period.

Of the three sides of the fraud triangle – incentive/pressure, opportunity, and rationalization – there is only one part of the process that you, as an employer, can control. Opportunity. If you limit the chances for your staff members to defraud your practice, you will succeed in protecting your hard-earned dollars from theft. Background checks are a must when hiring. All it takes is a few phone calls for you to be reasonably assured of the integrity of your potential hire. Segregation of duties is also imperative. For example, separate the role of purchase approval from actual purchasing to eliminate personal purchases that can sneak into the invoice. Also be sure to keep the roles of purchasing and payment separate, since you don't want anyone writing a reimbursement check to pad the expenses to his or her benefit. Inventory counts are an excellent way to make sure product isn't walking out the back door. As the owner, be sure to review your financial statements at least quarterly, to ensure that your assumptions (when it comes to staff members, purchasing activities, and expenses in general) are accurate.

Once your controls are in place, provide a continuing education meeting to ensure that you and your staff are on the same page. Enlist the aid of experts, such as your banker or your insurance agent. Their job is to protect your assets, so they should have tools or information to help you fraud-proof your practice. Use the information they share with you during the continuing education session, or invite them to lead the session and explain the importance of the fraud controls you implemented. Finally have your staff members sign a document indicating that they understand and will abide by the practice's fraud prevention policies.

Simply coming up with a list of controls to limit the opportunities for fraudulent activities is not enough. You must enlist the help of your team in implementing and in actively using the controls for two reasons. One, once everyone is aware that measures are in place to track both finances and inventory, would-be perpetrators may have second thoughts about taking advantage of your practice. And two, you simply can't implement these control by yourself. If you are going to implement (and continue to implement) controls your team must be onboard. Another red flag: naysayers to fraud control measures may have more to lose than they care to share with you.