Fraud Costs Businesses Six Percent

February 1, 2005
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GRAND RAPIDS — Adamy & Co. started working in fraud detection and prevention nearly three years ago, and the specialty has become one of its fastest growing offerings.

As one of a handful of certified fraud examiners in West Michigan, Adamy's Paul Spindler and his team work with attorneys to root out fraud in companies when it is suspected, and with other companies to strengthen internal control systems to prevent it.

He indicated that fraud is an area needing work. Anti-fraud specialists estimate that the typical U.S. organization loses 6 percent of its annual revenues to fraud, working out to approximately $660 billion in total losses to the nation in 2003.

These were among findings presented by the Association of Certified Fraud Examiners (ACFE) in its 2004 Report to the Nation on Occupational Fraud and Abuse. The report was based on 508 cases that fraud examiners investigated. The report details over $761 million in losses.

"That could be abusing an expense account, or — if you're a retail operation — that could be taking cash from the business before it hits the till," Spindler said. He said that for a manufacturer, fraud could be inventory theft or any situation where an employee steals.

Spindler said he has also seen elaborate schemes such as creating fictitious vendors or employees, plus many forms of embezzlement.

Notably, small businesses suffer disproportionately from occupational fraud. The ACFE study found that the median loss experienced by businesses with less than 100 employees — representing 46 percent of the cases studied — was $98,000, higher than the median loss experienced by all but the very largest organizations. The median loss for companies with 100 to 999 employees was $78,500.

"As a business gets larger, they tend to have stronger internal controls in place," Spindler said. "There are multiple individuals working in an accounting department. In a smaller business, you've got one or two people working in that area and you've got a lot more opportunity than if you have a segregation of duties."

The report suggested that weak internal control systems were a common denominator in the cases studied.

Organizations that are defrauded seldom recover their losses, the study said, with a median recovery among victims only 20 percent of original loss. Almost 40 percent of victims recovered nothing.

"It's not like they're stealing it and putting it in a bank account," Spindler said. "They're stealing it to spend it. Maybe you could set something up like garnishing their wages, but that's if they aren't going to jail."

One thing Spindler has noticed, especially in closely held businesses, is that fraud often brings out a very emotional response.

"It's common that when fraud occurs, it's a very trusted employee," he said. "There is a feeling in your stomach that just won't go away, and it can be an anchor on the business to go forward."    

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