Fraud can have a tremendous negative impact on the value of a business. Not only does the immediate loss reduce the ability of a business to pay current obligations, but the diminished revenue can significantly lower the net income figure that is often used in a multiplier formula to estimate current market value of a business.
Strategies for Reducing Fraud
According to research by the Association of Certified Fraud Examiners, an anti-fraud hotline to gather tips and information is the single most effective measure, resulting in a 54.5 percent reduction in fraud losses. The next most effective were employee support programs, surprise audits, fraud training for managers and executives, job rotation/mandatory vacation, and fraud training for employees. Each of these strategies was associated with at least a 45 percent reduction in fraud losses according to the study performed by ACFE.
Utilize Existing Strategies
Interestingly, the strategies that were most effective were also the ones least likely to be implemented by the businesses that participated in the survey. Thus, it would seem that the most effective anti-fraud measures are underutilized. While any organization is potentially vulnerable to fraud, the risk can be mitigated to some extent by setting up appropriate anti-fraud measures before a loss occurs.
For a more detailed analysis of the AFCE findings, click here.
My friend and networking colleague Eric Williams of Codiligent, LLC also blogs on business transactions. A few years ago he posted an interesting blog entry about the impact of occupational fraud (embezzlement and other financial misconduct).
The blog entry focused on the 2010 findings of the Association of Certified Fraud Examiners (ACFE), which determined that the median occupational fraud loss was $160,000. Because business sale prices often are based on a multiple of earnings, fraud can result in potentially devastating reductions to the sale price of a business. Eric’s original post can be found here.
In 2012, ACFE updated its findings with a report that the median occupational fraud loss had dropped to $140,000, but more than a fifth of those cases involved losses exceeding $1 million. Among other key findings from the 2012 report:
• The median fraud reported to ACFE lasted 18 months before detection.
• Occupational fraud is more likely to be detected by a tip from an employee of the victim company.
• Occupational fraud is a significant threat to small businesses. The smallest organizations in our study suffered the largest median losses. These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.
• The industries most commonly victimized are banking and financial services, government and public administration, and manufacturing.
• The presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Victim organizations that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than organizations lacking these controls.
• Nearly half of victim organizations do not recover any losses that they suffer due to fraud.
This is an area of risk management that small businesses simply cannot afford to ignore. What precautions does your business have in place to avoid fraud?