The Threat from Within: Protect Your Business from Internal Fraud

By Fallon Consultants
On February 5th, 2015

Data concept:  Opened Padlock with optical glass on digital backAlthough hacker-perpetrated cybercrime often makes headlines, small to midsized businesses (SMBs) face a less visible, but just as serious, threat: internal fraud. This type of fraud involves the theft of money, physical property, or information perpetrated by an insider, such as an employee. In its 2012 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) reported that smaller organizations account for 32% of business fraud cases.

Businesses that fall victim to fraud will find that its resulting expenses can be catastrophic. On average, fraud losses consume 5% of a company’s annual revenues, reports the Journal of Accountancy (“Are Organizations Hindering Whistleblowing?” December 2014). That could amount to over $600 billion a year — about $4,500 per employee, reports CPA Practice Advisor.

For SMBs, such statistics reinforce the necessity of understanding your business’s fraud hotspots and taking steps to reduce the likelihood of internal fraud. What are your business’s three most vulnerable areas?

Internal controls
Although financial controls are a necessity for effective fraud prevention, many SMBs fall short in this area. A 2013 Bank of the West survey found that only 18% of small businesses use two-person controls, a fundamental fraud-prevention procedure. A smart practice is to divide up responsibilities — such as approving purchases or preparing checks and signing checks — among two or more employees to ensure that no one person performs all accounting duties.

Information security
Too many SMBs do not protect their information assets properly. The ACFE report found that only 48% of small businesses secure documents in locked or password-protected files. In addition to adequate password protection, companies must determine a strategy for preventing and responding to theft of insider information, which includes monitoring for suspicious employee activity and limiting access to information on a need-to-know basis.

Auditing can help SMBs identify high fraud-risk business areas. Regularly audit areas such as expense reporting and cash and sales reconciliation. Textual analytics software can also be helpful in fraud auditing; such software enables you to search for phrases in email or other communications that could indicate fraudulent activity. Additionally, audits may help deter fraud by making your fraud-prevention efforts highly visible to employees.

In addition to these practices, be sure to enlist your employees’ help with fraud prevention. Assess your internal whistleblowing program to make certain employees understand how to submit a tip and are willing to do so.

Internal fraud could cause tremendous damage to your company — enough to shut down your business. Securing fraud hotspots can protect your business from fraud incidents before they happen. For further help with implementing fraud safeguards in your company, contact a business solutions provider like Fallon Consultants by email or at 845-624-3504.


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