Fraud is a serious issue that could bring down a company, no matter its size.
Fraud is a serious issue that could bring down a company, no matter its size. According to research by the Association of Certified Fraud Examiners (ACFE), businesses lose an estimated 5% of their annual revenue as a result of fraud committed by employees, managers, owners and executives.
“Fraud detection and prevention should be an ongoing initiative,” said Cynthia Hetherington, founder and president of the Hetherington Group, a consulting firm that focuses on intelligence, security and investigations. “[Businesses should] develop and review policies and controls to fight fraud and safeguard their livelihood from this continually growing problem.”
What is business fraud?
Business fraud occurs when a person or a company commits dishonest and illegal acts that result in a financial gain for that person or organization. Business fraud can often be hidden and appear to be a legitimate business interaction.
Because fraud is such a monumental problem – so much so that it could even lead to the critical failure of an otherwise successful business – it’s important to combat it vigorously. Research published in Harvard Business Review (HBR) suggests that those in the best position to fight fraud are employees.
To encourage employees to come forward when they are aware of fraudulent activities, companies should consider offering job protections, and even rewards, to whistleblowers. Unfortunately, firms engaged in fraud often offer incentives for employees to ignore the fraud instead, and these methods work.
“Misreporting firms that granted more stock options to rank-and-file employees were less likely to be exposed by a whistleblower,” HBR researchers wrote. “Approximately 10% of the firms in our sample were subject to a whistleblowing allegation. Firms that avoided a whistleblower granted 78% more stock options than these firms did not.”
Part of avoiding this vicious cycle in the first place is to build a culture of anti-fraud right from the start. Owners and managers should put together a list of anti-fraud policies in good faith that will govern the organization for years to come and, in the case the company goes public, be subject to shareholder review before being revised or rescinded.
Hetherington offered the following tips to help businesses protect themselves from fraud:
- Offer internal and external audits.
- Create management reviews and independent audit committees.
- Offer fraud training for management and employees.
- Have mandatory vacation and job rotation.
- Create a hotline or tip line and rewards for whistleblowers.
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