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The season of taking: Avoiding occupational business fraud over the holidays
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It’s commonly referred to as the “season of giving,” but business owners should beware of winter’s notorious reputation as the “season of taking.” According to the Association of Certified Fraud Examiners (ACFE), fraud increases an estimated 20% between Thanksgiving and New Year’s Day, and it does not discriminate between large and small businesses.
With the hiring of seasonal workers, occupational fraud poses an additional threat to businesses during the holiday season. In 2014, additional ACFE research revealed that organizations with fewer than 100 employees accounted for 31.8% of occupational fraud cases, making them the most common victims. Relevant for Wisconsin is the fact that manufacturing businesses, as well as financial services and public entities, reported the greatest number of cases.
Occupational fraud refers to “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” as defined by the ACFE — and it is a rampant problem, with a median loss of $145,000. How can manufacturers and other businesses protect themselves?
The three main categories of occupational fraud are asset misappropriation, corruption, and financial statement fraud. Of these, asset misappropriation is the most common. Employees who work in accounting, purchasing and finance, sales, and executive management have consistent access to corporate financial assets. On average, fraud occurs over a median of 18 months before detection.
Furthermore, 49% of all victims surveyed did not recover any losses — a figure that affects the bottom line of small businesses significantly more than large corporations.
Smaller businesses may not be able to afford sophisticated fraud-detection systems, but the good news is that basic anti-fraud controls can significantly reduce their vulnerability to occupational as well as other fraud categories.
One smart approach is to implement an external tip line. According to the ACFE study, tips are the most important way occupational fraud is discovered, accounting for 43% of detections. The majority of these tips are given by employees at the targeted organization. An external tip line ensures employees’ anonymity and therefore willingness to say something. A tip line also serves as a way to control the tone at the top.
Other important ways to combat insider threats include “dual controls” for all payment methods and segregation of employee duties. Business owners should ensure employees log out of online banking sessions when those sessions are over. Also, sensitive information should never be stored on portable devices. Also, to help avoid conflicts of interest, don’t compensate corporate controllers based on the financial results of the business.