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Ronda Pitts
Member
Entrepreneurial Services
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Myles MacDonald
Principal
KraftCPAs Turnaround & Restructuring Group, PLLC
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Glenn Perdue
Member-in-Charge
Kraft Analytics, LLC
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A Nashville woman was indicted earlier this year on 40 counts of embezzlement from her employer. The indictment alleged that the bookkeeper had issued herself checks over three years – checks ranging from about $15,000 to more than $60,000. Most business owners might think they would notice embezzlement immediately, but occupational fraud schemes frequently continue for years before they are detected, according to a study by the Association of Certified Fraud Examiners (ACFE).
We wanted to share with our readers some of the statistics reported by the ACFE in the 2008 Report to the Nation on Occupational Fraud & Abuse and call your attention to this escalating problem of fraud and embezzlement. According to Ronda Pitts, CPA, the member-in-charge of KraftCPAs’ entrepreneurial services team, “Unfortunately, when the economy takes a downturn as we have experienced in the past couple of years, the number of employee embezzlements tends to increase. The risk is particularly high for small businesses where lack of personnel contributes to the problem. Segregation of duties is particularly difficult in a small business, but there are steps business owners can take to reduce their risk.”
According to the 2008 ACFE report, small business frauds are most likely to be detected by tips than by external or internal audits or other forms of internal control. Continuing the trend of previous studies, the 2008 study reported that “…small businesses – defined as those with less than 100 employees – suffered both a greater percentage of frauds and a higher median loss than their larger counterparts”. The median loss in companies with less than 100 employees was $200,000 in 2008. The study also reported that fraud was most often committed by members of a company’s accounting department or upper management.
Businesses can reduce risk
The study also compared the median losses at organizations that had implemented various controls with the median losses for those organizations that had not. Two controls that were associated with the largest reduction in median losses – surprise audits and job rotation/mandatory vacations – were among the least commonly employed controls.
Ronda adds, “As hard as it may seem to function without a particular employee, requiring vacations is a simple and often effective tool for preventing and uncovering embezzlement. All employees who deal with the company’s accounting should be required to take at least five consecutive days of vacation away from the business, while other employees rotate through the position, assuming the accounting duties. This leave will require the owner or other employees to handle accounting records and may be an effective process to help reduce the incidence of fraud. Sometimes, just knowing that someone else will be looking at accounting records may make someone think twice about trying to embezzle.”
A third control associated with a large reduction in median loss is the use of a fraud hotline or other publicized reporting mechanism. “It’s management’s job to set the tone of the organization. Facilitating tips, the most common method by far of identifying fraud, should be an important control measure,” says Myles MacDonald, a principal in KraftCPAs Turnaround & Restructuring Group, PLLC. There are a variety of additional ways that businesses may reduce the frequency and potential loss of fraud. Ronda says, “Most small businesses won’t invest in a financial statement audit unless they are required to do so by a third party. But they could invest in an internal control study to point out weaknesses in their systems and recommend ways to reduce risk.”
KraftCPAs fraud investigation team
KraftCPAs and our affiliates have extensive experience with a variety of fraud matters including Ponzi schemes and work for businesses, financial institutions, investors, receivers, and trustees in bankruptcy. Several of our professionals hold the Certified Fraud Examiner certification. According to Glenn Perdue, member-in-charge of Kraft Analytics, LLC, “We are often engaged in cases involving a large amount of analytic work, such as recreating accounting records from bank transaction activity, tracing assets, and interviewing staff to identify fraud. Our team has extensive experience in this type of analysis. We can assist you in a wide range of matters, from identifying potential fraud to providing expert witness testimony.”
For the complete 2008 Report to the Nation on Occupational Fraud and Abuse, visit www.acfe.com.
KraftCPAs is a certified public accounting (CPA) firm headquartered in Nashville, TN that provides accounting, audit, tax and consulting services. KraftCPAs Turnaround & Restructuring Group, PLLC and Kraft Analytics, LLC are affiliated with KraftCPAs PLLC.
KraftCPAs is a public accounting (CPA) firm headquartered in Nashville, Tennessee providing fraud investigation and deterrence services.
