Occupational fraud is more than just a financial hazard. It can transform a company’s reputation, culture, and relationships. However, before dealing with any of the deeper repercussions from fraud, exposed organizations must “clean up” the damage. This may involve terminating employee culprits, filing civil action, or reporting perpetrators to the police. Whatever a company decides to do in the aftermath of a fraud incidence, prompt action is critical, and internal controls must be addressed.
How Do Defrauded Victims React?
The Association of Certified Fraud Examiners (ACFE) reports in its Occupational Fraud 2024: A Report to the Nations that when employers discover fraud, 67% choose to fire the perpetrators. In 57% of cases, companies refer fraudsters to law enforcement. Of those cases, 45% result in the perpetrator pleading guilty or no contest, with 27% being convicted at trial. In 14% of referred cases, law enforcement declines to file charges.
When fraud is discovered, legal counsel becomes important. If your company discovers fraud, consult your attorney before conducting any investigations. Attorneys can advise you on how to handle probable suspects, such as whether to suspend or fire them, how to notify them of your decision, and how to communicate with other employees.
Also, consider hiring a forensic accountant. This fraud expert can assist with analyzing records and data, identifying suspects, questioning witnesses, recuperating financial losses, and gathering evidence that will stand up in court (if applicable). Consider asking your attorney to hire the forensic accountant.
Whether your organization or a fraud expert performs the inquiry, it will usually include multiple phases. These involve acquiring and evaluating pertinent documents (including digital files), questioning potential offenders and coworkers, and composing a thorough investigative report. Your company must also determine, with legal counsel, whether to file criminal or civil charges against those implicated.
How Can You Reduce Losses?
Recovering financial losses caused by fraud is often not easy. According to the ACFE, 57% of organizations recovered nothing, 30% made a partial recovery, and only 13% recovered all fraud-related losses.
Such data underline the importance of strong internal controls to prevent losses in the first place. For example, the ACFE states that if a business does not use surprise audits, the typical loss from fraud is $200,000. However, if surprise audits are conducted and an organization experiences a fraud incident, the median loss is only $75,000, representing a 63% reduction. Obviously, taking this approach to risk reduction admits that internal controls are not always perfect. However, when controls are implemented — especially if your organization has multiple layers of security — they can considerably lower median losses and potentially prevent fraud entirely.
In addition to surprise audits, the following controls are linked to faster detection of schemes and at least a 50% reduction in financial losses:
- Management reviews
- Routine financial statement audits
- Anonymous fraud tiplines
- Fraud training for managers
- Documented antifraud policies
- Proactive data monitoring
The most common factor in 32% of fraud incidents is a lack of – or a failure to maintain – internal controls. In another 19% of cases, managers or others bypass existing controls. Therefore, controls must not only exist, but they must also be strictly observed.
How Should You Manage Risk?
If an employee commits fraud, your organization’s response will be determined by the severity of the fraud, the available proof, and a variety of other considerations. Take steps today to ensure that your internal controls address risks to your organization so that you never have to make such difficult decisions. Contact us for assistance.
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