Safeguarding Your Business: How To Reduce the Risk of Fraud

Starting out in public accounting as a fresh-faced graduate, I naively thought there was a reasonable chance I would find fraud as part of an audit. Assessing fraud risk was always part of the prep work, but after years of auditing, no fraud had turned up. Turns out I shouldn’t have been surprised. 

The 2024 Report to the Nations by the Association of Certified Fraud Examiners (ACFE) sheds light on the persistent threat of occupational fraud. According to the report, only about 3% of occupational fraud is actually discovered by external audit. Turns out that employee tipsters are responsible for the lion’s share of fraud detection.

This proved true in my experience. The one real instance of fraud I ran across wasn’t discovered through the audit process. I can’t even remember if the organization had been audited before. In this case, the fraud had already been uncovered by the organization and now they wanted to understand its scope.
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Turns out that the Executive Director of a nonprofit was submitting invoices from a fictitious vendor and also turning in personal expenses for reimbursement. This resulted in about $250,000 in stolen funds. The mind-blowing part was that this person had stolen money from a previous employer! The former employer hadn’t charged the individual, probably to avoid bad publicity, nor had they been contacted during the ED’s hiring process. Learning from their error, the nonprofit did bring charges this time around. When the culprit was located, they were in another state already working at yet another nonprofit.

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Occupational fraud encompasses a spectrum of deceptive practices carried out by employees. Billing and expense reimbursement fraud, along with corruption (i.e. bribery, kickbacks, bid rigging, economic extortion), and noncash asset theft, comprise the four most common types of fraud employed. Often multiple types of fraud are being perpetrated simultaneously when the opportunity to do so is there.

Fraud remains a costly challenge for organizations worldwide, with an estimated 5% of revenue lost to fraud each year. While alarming, there are established ways of reducing the likelihood of fraud in your organization.

Leaning on Internal Controls
One of the most potent weapons in the fight against fraud is the implementation of robust internal controls. Controls protect organizational integrity, erecting barriers against illicit activities while fostering transparency and accountability. Here's how internal controls play a pivotal role in fraud prevention:

Segregation of Duties (SoD)
By dividing critical tasks among different individuals or departments, SoD reduces the risk of collusion and unauthorized activities. For instance, separating the responsibilities of initiating transactions, approving it, and reconciling the related bank or balance sheet accounts, creates a system of checks and balances that deter fraudsters. 

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This is a challenge in smaller organizations, where people are required to wear many hats and a lot of trust is placed in individuals. Be careful not to fall into the trust trap. The longer an individual works for an organization, the more expensive the potential fraud can be. If you don’t have the headcount to allow for proper SoD, then consider working with an experienced part-time accountant who can provide this type of support.

Regular Monitoring and Auditing
Continuous monitoring and periodic internal audits serve as proactive measures to identify irregularities or suspicious patterns in financial transactions and operational processes. Through scrutiny of records and transactions, even on a random basis, organizations can detect potential fraud schemes and intervene before substantial losses occur. In small organizations, it may be the owner that needs to periodically take on this task. At the very least it needs to be someone other than the person handling the books or controlling the physical assets.

Establishment of Clear Policies and Procedures
Clear and well-defined policies and procedures provide employees with guidelines for ethical conduct and delineate acceptable practices. Consistent enforcement of these policies fosters a culture of compliance, dissuading individuals from engaging in fraudulent behavior due to the fear of repercussions. Furthermore, documented procedures enable employees to more easily step into different roles. This reduces the perceived reliance on a sole individual who might be hoarding information and restricting others’ access, which can be a red flag.

Utilization of Technology and Data Analytics
Leveraging technology can make it more difficult for an individual to influence how information enters your accounting or data management system. This can make it harder for bad actors to make changes without leaving evidence that can be traced. Knowing there will be a clear trail of implicating evidence will serve as a strong deterrent.
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Data analytics tools enable organizations to analyze vast amounts of data rapidly, uncovering anomalies and discrepancies with expectations. This can point to areas for further investigation. Analyzing information in different ways, such as comparing expenses against previous years, reviewing lists of new vendors, comparing sales against changes in inventory, can all help identify where fraud might be occurring. 

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Employee Fraud Training
Investing in the education of employees on the warning signs of fraud and the importance of ethical conduct can empower them to become guardians of the organization. Employees are far and away the best situated to see and say something about fraud. This is highlighted by the previously mentioned fact that employee tips are the leading way that fraud is detected. Fostering a culture of awareness and vigilance is a low-cost way to use one of your most valuable resources, your employees, to protect the organization.

Take Action!
In an era defined by heightened scrutiny and accountability, the proactive adoption of controls is not merely a prudent investment—it is a strategic imperative for safeguarding organizational assets and reputation in the face of evolving threats.

If steps aren’t taken to prevent fraud, or at least detect it early, the costs can be significant. The longer a fraud goes undetected, the higher the cost will be.

If you are struggling to implement an appropriate control environment for your business, we can help. As fractional accountants we have a highly experienced team that can partner with you on a part-time basis to help create and maintaining tight internal control environment. Contact us and we would be happy to discuss your internal controls issues and how we can support you.  

Data, statistics, and charts provided by Occupational Fraud 2024: A Report to the Nations. Copyright 2024 by the Association of Certified Fraud Examiners, Inc.

About the Author
Jason McGill - Oregon & SW Washington Practice Leader, The ASP Team

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Jason is a dynamic accounting and finance manager with 15+ years of experience. He started out his career in public accounting, with a specialization in nonprofit auditing. Jason holds a CPA license in the state of Oregon. He has led the ASP practice in Oregon since 2020 and is committed to helping small businesses find the needed support to solve their unique challenges.

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