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We’ve all heard the saying, “the more things change, the more they remain the same.” And so it is with the topic for this edition of our newsletter: occupational fraud.

No matter how much we talk about it, no matter how hard we try to eradicate it, occupational fraud remains a significant threat to the stability and profitability of businesses of all sizes. People who are trying to take your business down could be anywhere — in your warehouse, in the accounting department, perhaps even in the office next to yours — and very often they are the individuals that you trust the most and would be the last to suspect of any wrongdoing.

While trust helps create a successful business, an excess of trust can tear it down. In his article, our associate, Chris Todd, who is a certified fraud examiner, takes a look at the most recent statistics on occupational fraud and offers helpful suggestions to prevent it from occurring in your business.

The statistics show that fraud isn’t going to go away. When given the opportunity to cheat, far too many people will take advantage. But you should never accept fraud as inevitable. Rather, do everything within your power to make sure it doesn’t happen to you—even if it means being a little less trusting.

We hope you find these ideas helpful, and we encourage you to forward this newsletter to anyone you think might find this information valuable.

As always, your comments are welcome, and we look forward to hearing from you.

Sincerely,
Tom Beane, President CMC CIRA

To minimize the risk of fraud in your business:

Set high ethical standards, and be sure to practice and enforce them.

Identify and correct areas of weakness within your organization.

Establish strong controls and oversight for all business accounts.

Monitor inventory carefully.

Encourage employees, vendors and customers to report any suspicious activity. Consider creating a system to accept anonymous tips.

The message you are about to hear is not new. But keep reading. A lot of businesses didn't get the message the last time, and they continue to pay the price.

Every other year, the Association of Certified Fraud Examiners (ACFE) issues a report on occupational fraud and abuse. The 2012 report, released earlier this year, tells the same story as was told in the first report, in 1996. Only the numbers have changed.

Occupational fraud is a big problem for businesses, in the United States and around the world, costing companies worldwide an estimated 5 percent of their gross revenues, more than $3.5 trillion, during 2011. Nevertheless, thousands of businesses either do not establish or do not adhere to controls that could have a significant impact on reducing fraud within their operations.

And, for as long as businesses give their employees the opportunity to steal, some of them will take advantage of it. And, by the time fraud is detected, losses can reach levels that could be devastating to small and mid-sized businesses.

Consider these findings from the 2012 report:

Frauds reported to ACFE took a median of 18 months to detect, and the median loss was $140,000. Losses in one out of five cases totaled $1 million or more.

The longer the perpetrator has worked for an organization, the higher the loss is likely to be. Frauds committed by employees with 10 or more years of experience caused a median loss of $229,000. Those committed by individuals in their first year on the job had a median loss of $25,000. The message, while obvious, is often ignored: the employees you are more likely to trust have the potential to do the most damage.

Perpetrators with higher levels of authority tend to cause greater losses. The median loss for frauds committed by owners/executives was $573,000, compared with $180,000 for managers and $60,000 for employees. The message: strong controls are needed at the top, and throughout the organization.

Most occupational fraudsters are first-time offenders with clean employment histories. Of the perpetrators in reported cases, 87 percent had never been charged or convicted of a fraud-related offense and 84 percent had never been punished or terminated by an employer for similar conduct. The message: a clean past is no guarantee of a clean future; rather, it might mean that the perpetrator has never been caught before.

Nearly half of all occupational fraud victims never recover any of their losses.

The ACFE uses three broad categories to describe fraud: asset misappropriation, corruption, and financial statement fraud. The vast majority of frauds (86 percent in the report) involve asset misappropriation, which covers everything from removing inventory from a warehouse to skimming cash before it is recorded on a company’s books to claiming overtime for hours not worked or reimbursement for nonexistent business expenses. Corruption cases cover bribery, conflicts of interest and accepting kickbacks or gratuities from vendors. Financial statement fraud includes a variety of activities associated with overreporting or underreporting assets or revenues. READ MORE

To view additional articles, please go to:
http://www.beaneassociates.com/news/newsletter/

Situation: A multi-plant, highly leveraged precast concrete manufacturer was expanding out of its core market just as the recession hit. The company hired Beane Associates to help restructure the company and prepare part or all of the company for sale.

Result: The Beane Associates team analyzed the company's operations and financials. It was recommended that the company split two remaining plants into separate profit centers and sell the newer, larger plant. With a buyer as a stalking horse, a Chapter 11 bankruptcy was filed for a sale of assets. After closing the sale of the newer plant, the old plant was run in an extremely lean mode, enabling the company to emerge from bankruptcy.

Situation: This large, well-established distributor of industrial and construction-related parts and supplies was unable to meet competitive pricing pressures brought on by larger competitors. Beane Associates was retained to oversee and manage the liquidation of all assets through auction and directly manage collections of receivables.

Result: Beane Associates conducted a thorough analysis of inventory and other assets and directly managed collection of receivables that exceeded all stakeholders' initial expectations for recovery.

Situation: The resort country club was trapped with private status in a remote, undersold and underbuilt community and was unable to establish sufficient income to appropriately maintain operations.

Result: At first, Beane Associates was sent in to oversee a court-appointed receiver. The receiver, although very experienced in golf operations, ultimately resigned from the assignment. The court then appointed Beane Associates to step in as receiver. We were able to secure and maintain the facility. Our efforts included contracting with a professional golf management company to reduce operational costs and provide alternate market directions that led to the sale of the business and full debt recovery for the secured creditor.

Situation: Beane Associates was retained to monitor the operations of an imported automobile dealership due to non-compliance with the existing covenant and to review a potential change in ownership.

Result: Manufacturer delays severely limited the volume of vehicles being allocated to this dealer. This, along with management's lack of attention to detail and it's focus on another owned store, greatly contributed to decreased profitability. The significant loss of vehicle sales eventually led to an out-of-trust situation which reached approximately $2 million. Consistent weekly monitoring ensured a renewed ownership focus, a reduction in the out-of-trust violation and timely payment of new car sales until a cash infusion from an outside equity investor allowed the secured lender to exit.