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The Best Fraud Deterrent is a Bargain at $0 (And a Smudge of Mustard)

The Best Fraud Deterrent is a Bargain at $0 (And a Smudge of Mustard)

Big businesses have large budgets (and whole departments) to prevent and detect fraud. And it is money well spent, considering that fraud costs organizations a median estimate of 5% of revenue annually.*  Now, while it doesn’t sound like much when the cashier at Target offers you a 5% discount if you apply for a credit card, to a small business owner with a dozen employees who generates $1 million in revenues,. $50,000 is serious money to lose.

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So what can a small business owner, not-for-profit director or benefit plan trustee, do with few resources earmarked for internal audit staff or cyber-security? The answer is that they can still afford the greatest fraud deterrent that exists….because it doesn’t cost a thing.

“The Perception of Detection” is the greatest fraud-fighting tool on the market today (actually it has been, well, forever). If you were ever in the position or had a burning temptation to steal, but you thought there might be a chance that you would be caught, would you do it? For most, the answer would be ‘no way.’

In my experience with embezzlement investigations, the person that could be anyone—a  cashier, a factory worker with access to inventory, an office manager—in a position of trust, giving him the opportunity, access and, most-importantly, the knowledge that his boss never reviewed or questioned what he did. As long as the employee handed in her report on a nice-looking spreadsheet with a neat stack of documents underneath it, it was considered golden, and in the file drawer it went. Done.

Regardless of the type of organization or the valuables at risk, I can always suggest ways to create the perception that a theft or fraud will be detected. How easy is it these days with technology to give your employees the impression that there are now tiny security cameras discreetly hidden in the office, which allow you to monitor operations remotely on your computer or phone? You don’t even have to spend the money for cheap, fake ones like the old days!

So whatever your position or industry, be shrewd and even a bit creative to find some ways to create that perception of detection, which will make anyone think twice about stealing 5% from you this year. And with that, I will leave you with a story related to one of my favorite zero-cost deterrents.

I had a long-time client who owned several auto dealerships. Because he had built a successful business with a great team, he didn’t find the need to monitor the daily processes or review the work of his accounting managers or key staff, because, indeed, they were all good and capable people. But auto dealerships are ripe for employee theft, because they have checking accounts for everything (general, payroll, DMV, sales tax, rebates, you name it) and their reconciliations can confuse even the most seasoned of auditors. So one day at lunch I told him, “Bill, you need to segregate some of the accounting duties to instill the fear that things like a forged check or payment to a phony vendor would be caught, so you need to receive and open the sealed bank statements personally each month. As Bill groans, I continue, “I don’t care if you just open the envelope and muss up the pages or put a smudge of mustard from that sandwich on it; as long as they think you are going through them, it’s fine.”

 

*   Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study, pp.8.

Author: Richard C. Gordon, CPA/ABV/CFF, CFE, CGMA, Director of Forensic and Valuation Services

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