Did you know that it's likely that someone stole money from your company? It might even be happening right now! Fraud comes in many forms. Some are obvious and well-known, while others are more subtle and hard to spot. This two-part article gives more information about the subject. Part 1 helps you figure out if your business is at risk for fraud or if it is already a victim of fraud. It talks about fraud in more depth and gives definitions and examples of fraud from real life. In Part 2, you'll learn how to stop fraud in YOUR company.
What is cheating?
Fraud and abuse cause companies all over the world to lose a huge amount of money. Studies done by the government and by private groups say that the following situation is typical. A company that makes things makes $60 million in sales and $18 million in profit each year. About 6 percent of income ($3.6 million) was lost to fraud and abuse. The company's profit margin on sales is 30%, so they need to bring in an extra $12 million in sales (20% more sales) just to cover the costs of fraud and abuse. (Info from PWC.)
The United States Sarbannes Oxley Act of 2002 was passed as a direct response to a number of well-known accounting scandals (or "frauds") at well-known companies. The goal of the Act was to both close the loopholes that allowed these violations to happen and hold companies responsible for them.
But what does fraud mean?
The Merriam-Dictionary Webster's of Law, Inc., says that the most general definition of fraud is:
"any act, statement, omission, or concealment that is meant to deceive another to his or her detriment; specifically, a misrepresentation or concealment of a fact that is important to a transaction that is made with knowledge that it is false or in reckless disregard of whether it is true or false, with the intent to deceive another, and that the other person reasonably relies on."
Fraud: Some Examples
According to this definition, fraud includes things like not making sure that business expenses are actually made, reported on time, or at the right dollar amount. It also includes not separating personal expenses from business expenses and failing to use care and follow rules over and over again.
Four common types of fraud and abuse have to do with:
- Deals between people who are related
- Travel and entertainment expenses
- Getting goods and services from vendors, suppliers, etc. for free or less than the market price.
- Use of company credit and purchasing cards without permission
And it can be hard to figure out exactly when the fraud happened. Corporate fraud comes in many different forms, not all of which are clear at first glance. For example, companies spend millions on accounting software, CRM, ERP, and database solutions with the highest level of security and data integrity so they can run their businesses. Most of the time, though, this data ends up in spreadsheets, where it's very easy to lose the integrity of the data. This last part of the journey of information is called THE FRAGILE LAST MILE. During the fragile last mile, there are usually no controls or standards, and IT is not held responsible, so the information can be used in any way.
For example, when Fidelity changed a plus and minus sign in a spreadsheet, the Magellan fund paid out $2.4 billion in dividends. Due to a mistake in how the spreadsheet cells were set up, a loss of $1.2 billion turned into a payout of $2.4 billion.
In the same way, CA (Computer Associates) released their financials with a $60 million mistake because of a small mistake in a spreadsheet.
Audit firms PWC and KPMG have looked into spreadsheet errors and found that about 9.0 percent of large spreadsheets have mistakes.
How do you cut down on fraud in your business?
Fraud is done by people of all ages, levels of experience, salaries, ethnicities, genders, geographic regions, and other types of demographic differences. To prevent and find fraud, you need to use controls in your corporate expense management software to make a place where fraud can't grow.
