The season of taking: Avoiding occupational business fraud over the holidays

Maggie Stauff,

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.

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Businesses also have to combat check fraud, the most common type of fraud. Even though overall check volume is declining, check fraud is persistently high because it’s relatively easy to perpetrate. Following “Check 21” legislation passed a decade ago, images of checks are now often processed in lieu of the actual check. Close examination of signatures is not typically a part of the check-clearing process. All a fraudster needs is a copy of a check and a laser printer in order to create realistic check images for deposit. Be aware that banks are not necessarily responsible for fraud of this type. It’s critical for businesses to review their accounts regularly for suspicious behavior. Many account agreements include time limits on fraud reporting.

Other practical steps to protect against check fraud include:

  • Purchasing check stock from known vendors that include built-in security features
  • Storing checks, deposit slips, and statements securely
  • Establishing a policy for employee check orders and reorders
  • Reconciling accounts daily using online banking
  • Using your bank’s Positive Pay services to pre-verify check and Automated Clearing House (ACH) debits that post to your account

Also, business owners should move to ACH for payroll, billing, and vendor payments if possible, as these electronic payments are often more secure.

With all this in mind, business owners should remember to keep a watchful eye on their companies’ finances, especially if they are hiring seasonal staff or have started doing business with a new provider during the holiday season.

Maggie Stauff is a treasury management advisor for Madison-based Wisconsin Bank & Trust.

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