6 Facts About Fraud… Oh, and Why You Need an Ethics Reporting System
Do You Think You’re Immune to Fraud? Of Course You’re Not!
This might sound a wee bit harsh, but no, you’re not immune to fraud. No matter your organization size, fraud will rear its ugly head, it’s just a matter of when.
Smaller companies are especially hit harder when fraud strikes, and we wrote about that here. But for those of you who think you don’t need a whistleblower program to fight fraud, please read on as we discuss 6 interesting facts about fraud supporting why you do need a whistleblower program and now!
The #1 Fraud Detection Method is a TIP
More fraud is detected by anonymous employee tips than by all other means combined. While it is important to continue to utilize multiple fraud deterrent methods such as external audits, separation of duties, and fraud awareness training, the most important tool an organization can implement is a confidential reporting hotline. A hotline is simple, providing an immediate means of communication and offers support and encouragement to employees.
33% of All Business Failures or Bankruptcies are Due to Theft and Fraud
Ouch! This is one fact that all small business owners need to be aware of. Because many smaller firms do not have the means or sophistication to implement strong internal controls, the extent of their losses can be devastating for their business. Because of this fact, it is even more imperative for smaller operators to have a hotline set up to ensure they can gain access to information earlier to mitigate any potential losses.
43% of all Private Companies Have Reported Experiencing Fraud
The other 57%? Well it might be a matter of time. While public companies are mandated to have a whistleblower system in place and now even more non-profits are implementing these systems as a way to protect reputational and financial risk, private companies who believe they don’t need these systems are setting themselves up for potential disaster. To be naive and think it won’t happen because you know your team or because everyone has worked together for a long time, is neither strategic nor logical. Most fraud is conducted by long-term employees who have access to accounting, operations, sales or manufacturing. Private companies need to ensure they put internal controls in place.
The Median Time for Fraud Detection is 18 Months
Just imagine! 18 months is a long time to continually bleed a company. That’s a whole year and a half of losing money and/or property due to theft and fraud. It can be devastating and at times non-recoverable for many businesses. The more internal controls a company has in place, the more quickly fraud will be discovered. Employee training, management’s commitment to a whistleblower policy and anti-retaliation practices are key to ensuring staff feels confident about coming forward to report wrongdoing sooner.
Small Businesses are Particularly Vulnerable to Fraud
Fraud costs small business a median loss of $155,000, according to the ACFE. Because small businesses are usually focused on the day-to-day operations, strategic planning can often get pushed to another day. Implementing vast internal controls is always best, but for small business, starting by instituting small measures to begin with is a good place to start. Again, setting up a hotline is easy, cost-effective and an instant way to gain access to information that could save your business.
49% of Victim Organizations Do Not Recover Their Losses
Almost half of all victim organizations discover their losses long after they have been spent. Studies show that the majority of business fraud does not go into investment properties or other such recoverable items, rather the perpetrators used it to support lavish lifestyle enhancements and spending, gambling or other addictions. And that’s it – the money is gone and good luck recovering it. This statistic is especially concerning as again, with no opportunity to recover the missing funds, 33% of businesses that experience fraud, ultimately fail.
Please watch this video shared by The ACFE. We share their concern about small business fraud and we strongly believe in the power of an anonymous ethics reporting system.
Want to learn more about ethics reporting and how it fits with your business plan? We’re always here to answer your questions.