As shocking as this may seem, occupational fraud currently is taking place across the construction industry. In other words, someone is stealing and, worst of all, the fraud probably is being committed by a trusted employee.
In its 2010 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) estimated a typical organization loses 5 percent of its annual revenue to fraud. At a time of slim margins and an uncertain future, a 5 percent reduction in the bottom line demands attention.
The ACFE also reports that small businesses are disproportionately at risk for occupational fraud due to a lack of sufficient internal controls. While internal controls cannot completely prevent fraud, they greatly reduce the time it takes to detect it.
According to the ACFE report, the median length of time a fraud is perpetrated prior to being detected is 18 months. As such, all small businesses should consider implementing some form of internal controls.
When it comes to who is committing occupational fraud, the ACFE says more than 80 percent of offenses are perpetrated by individuals in departments where key employees work, such as accounting, operations, sales, upper management, customer service and purchasing. As a result, appropriate internal controls should be tailored to each department.
Business owners should take the following steps to create a more robust fraud prevention program.
- Implement internal controls. Internal controls help safeguard assets, properly record transactions, and efficiently and effectively accomplish the organization’s goals and objectives, including compliance with applicable regulations.
- Institute a hotline. Awareness of a fraud hotline by employees, customers, contractors, service providers, suppliers and other third parties is an important component of an effective fraud prevention program. Confidentiality of tips reported on fraud hotlines must be guaranteed to ensure that those reporting suspected wrongdoing can do so without fear of retribution or reprisal.
- Set the tone at the top. In a small organization, the tone must start with ownership. Owners should promote an anti-fraud campaign publicly to their employees. An excellent tool for setting the tone is a code of conduct, which should clearly state the firm’s position regarding fraudulent activity, defining what is considered to be fraudulent activity and communicating the consequences. Require employees to sign a statement saying they understand the code and the consequences; create a culture of honesty, openness and assistance; and provide a program that helps employees deal with personal matters.
- Hire, promote and train ethical employees. Perform a background check on prospective employees, verify applicants’ résumés and applications, and train managers to conduct thorough and skillful interviews. Implement fraud education for all employees because awareness and knowledge are highly effective fraud prevention techniques. Remember, the cost of employee training is likely to be much less than the impact of fraud perpetrated by employees.
- Dispense fair and balanced discipline. Deal with fraud swiftly and consistently, even in instances where minor fraud is discovered. Make sure the penalty is aligned with the employee code of conduct.
- Identify and measure risks. Management should assess the organization’s exposure to fraud risk, as well as measure and mitigate any fraudulent activity. A fraud investigation unit should focus on preserving financial integrity, identifying and measuring fraud risk, improving processes and proactively preventing fraud.
- Don’t rely on a financial audit. Audits have measurable benefit by attesting to the financial statements relied upon by third parties. However, do not expect a financial audit to uncover fraud. Depending on the size of the business, an auditor might not detect fraud simply because it is not material to the financial statements.
It is often difficult for a busy small business owner to take the time to implement fraud prevention mechanisms and to investigate what appears to be fraudulent activities. But, remember that key employees with considerable operational knowledge pose the greatest threat of perpetrating fraud. If they are given anything but equal attention and treatment, the path to fraud remains open and inviting.