December 2003
By JAMES S. ANCHIN CPA
With the headline-making actions of Enron, WorldCom and other stricken companies, and the resulting Sarbanes-Oxley Act of 2002, corporate fraud has become an undeniable fact of today's business life. In fact, annual fraud losses in 2002 topped $600 billion, according to the Association of Certified Fraud Examiners' (ACFE) "2002 Report to the Nation on Occupational Fraud and Abuse."
Given this new fraud-conscious environment, the accounting profession and various regulatory and governmental agencies are mandating more rigorous auditing standards to help detect fraud. But don't count on an audit as your sole source of fraud protection or wait until some wrongdoing is discovered to put a solid plan into action. There is no guarantee that an audit will uncover fraud and by then it may be too late Ð putting your firm at risk for large financial losses, costly lawsuits or possibly ruin. It's estimated that 30 percent of all business failures stem from white-collar crime, with small businesses the most vulnerable.
The Most Common
Business Scams
If you have not yet implemented a fraud prevention program, the time to put it at the top of your company's priority list is now. To identify the kinds of frauds that existÑand to help determine the level of your exposure to itÑthe following are examples of the most common types of construction and business scams:
Profit skimming Ð The manager of an asphalt company was skimming profits with the help of a customer by charging less for the product and receiving a kickback from the customer.
Fictitious vendors Ð A general contractor hired a new controller who set up a fictitious insurance company as a vendor to receive payments.
Ghost employees Ð A subcontractor employed a number of non-resident workers. The sub's payroll clerk established a ghost-employee scheme using the names of some of the real workers.
Forged check and pocketed profits Ð A company's controller forged the VP's signature on several small-amount checks spread across a number of accounts. The controller also pocketed a portion of the cash received from the company's yard employees responsible for making materials sales.
Business subsidiary Ð The general
manager of a subsidiary used the subsidiary's labor and materials to perform
contracts on the side and pocketed the revenue from the jobs.
Minimize Your Losses Early
Are you at risk for fraud? As the above examples show, given proper access and technology, it's not as difficult as it seems for a committed thief to subtly steal from your business. And given the nature of the construction business, you may be even more susceptible. However, there are simple, practical steps you can take to protect your company from fraud.
Segregate dutiesÑIn small, closely held companies, it's not uncommon for one person to wear several hats. To protect your firm, make sure separate people oversee the four main functions of your operations: authorizing, processing, recording transactions and safeguarding company assets.
Review costs versus benefitsÑYour internal fraud prevention plan should never cost more than what your company makes in profits.
Establish regular fraud detection proceduresÑRegular internal auditing procedures designed to detect major fraud are valuable tools. Simply having these procedures discourages employees from committing fraud in the first place. Since the average fraud has been going on for at least 18 months before detection, early discovery will help you minimize your losses.
Keep on top of personnelÑWhenever there are changes in your company's personnel, monitor their access to your critical business operations. Also, watch for individuals spending beyond their means, or unusual behaviors such as avoiding vacation time.
Establish a hotlineÑCompanies are generally required to provide a way for employees to anonymously submit fraud concerns. A confidential, 24/7 hotline operated by a third-party professional is a good tool to help you identify issues early, investigate them and take action.
Educate your employees about fraudÑPublicize your fraud hotline throughout the company in break rooms, at the job site, at staff meetings and in employee newsletters. After all, a hotline isn't effective if employees don't know when to use it. Ongoing communication about ethical behavior should include what is acceptable, what is not acceptable, and how to report unacceptable activities.
Involve your suppliersÑVendors and suppliers can be a valuable fraud detection source. Additionally, they may know of employees within your firm who are taking kickbacks or committing other illegal acts. After being tipped off by a supplier, look for a paper trail to validate the allegation.
Because anyone can commit fraud Ð from the CEO and the controller to a subcontractor or supplier Ð no company is immune from this potential devastation.
Fraud prevention begins with diligent hiring practices, written policies and clear statements of expectations. With regular, ongoing monitoring, along with efforts to ensure that working conditions and compensation packages are adequate, you can help to ensure employee morale and loyalty remain high Ð and fraud is kept at a minimum.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.