Unfortunately, unethical conduct is common in the business world, and thus CFOs and other senior finance professionals must face up to the threat of fraud against their organization—and possibly in the finance department. CFOs and their teams should proactively look for red flags indicative of fraud and scrutinize their company policies, procedures, and controls for weaknesses that bad actors could potentially exploit. There are steps that senior finance professionals can take to prevent fraud or at least mitigate the risk of the organization falling victim to unethical conduct.
Organizations lose an estimated 5% of revenue due to fraud every year, according to the Association of Certified Fraud Examiners (ACFE) Occupational Fraud 2022: A Report to the Nations. While that number might not seem huge, a 5% revenue loss can be devastating to a company, especially a small to medium-sized enterprise, and it’s likely to weigh heavily on the accounting and finance team. The ACFE report found that a typical fraud case lasts 12 months before detection and causes a median loss of $117,000 per case and an average loss of $1,783,000 per case, with 15% of all reported frauds occurring in operations, 11% in executive/upper management, and 12% in the finance function/accounting department.
In general, corruption was the most common scheme in every global region. Specifically, asset misappropriation schemes are the most common type of fraud, representing 86% of cases tracked in the ACFE study and a $100,000 median loss, whereas financial statement fraud schemes are much less common, representing 9% of cases, but are the costliest, with a $593,000 median loss. Given that asset misappropriations make up such a large percentage of occupational fraud cases, ACFE scrutinized nine different categories of these frauds and analyzed how they impact organizations. The 2022 report found that billing schemes present a significant risk because they’re the most common form of asset misappropriation and cause the highest median loss. The ACFE study cited other high risks based on the frequency and financial impact of different types of fraud, including tampering with checks and other payment methods and noncash schemes such as theft of physical assets, investments, or proprietary information.
MITIGATING FRAUD RISKBrandy Keller, vice president of product and enterprise resource planning at LINQ and former VP of product, education, and nonprofit solutions at MIP Fund Accounting by Community Brands, says that there are various ways that accounting and finance leaders can protect their company, including segregating duties so that no single person is responsible for all financial processes; creating a secure environment for all cash transactions, particularly during an event; leveraging technology to track accounting transactions and financial processes; creating a digital trail of potential fraud risks in the event of an audit; and implementing strong online and off-line documentation and authorization practices. “Make sure there is a fraud policy in place and internal controls within your accounting system,” Keller says. “Understand that you don’t depend on yearly audits to catch fraud because at that point it might be too late.”
INTERNAL CONTROLSIt’s important for senior finance, information technology, compliance, and risk management executives to do stress-testing to evaluate their organization’s internal controls. One of the ways they can do this is by using a quarterly calendar reminder that includes all relevant stakeholders to test out the internal controls that the company is using to help reduce fraud. They can also check for the user restrictions and roles that are assigned to employees. “It’s also valuable to have a process for ensuring that, when an employee leaves, all the roles and rights assigned to that employee in the accounting system are removed, as well as for changing passwords and permission to all private data access,” Keller says.
SEGREGATING DUTIESMake sure that if you have a single finance team member who generates the company checks, there’s a different team member or manager who signs those checks. Organizations also often use a two-signature method on any checks larger than $1,000. “Make sure that, when it comes to account reconciliation, you also have controls in place where there is a second set of eyes on payments, invoices, and billing,” Keller says. Accounting and finance professionals have a duty to ensure that their organization is creating a secure environment for all cash transactions, regardless of the payment channel. At events, make sure you have a designated team member who will process the cash and a different team member who will verify transactions and ensure that the receipts match up. Sometimes common-sense measures are overlooked or forgotten, leading to increased risk. For example, make sure you have a locked cash box at events. “Have a segregation of duties even at live events to ensure that no one person is in charge of the entire processing of cash and check donations or purchases,” Keller says. “Make sure you have any printed checks locked up in a secure place at all times, even during events.”
ETHICAL CULTUREThe importance of finance leaders’ cultivating and maintaining an ethical culture and remaining vigilant for signs of unethical conduct can’t be overstated. CFOs should ensure that employees understand that it’s everyone’s job to help reduce fraud; that ethics, or a lack thereof, impacts the mission of an organization; and that there are ways for employees to anonymously report fraud through different communication channels, including helplines that might include various options for submitting a tip. “Both the fraud policy and the benefit for reducing fraud should be discussed at all employees’ onboarding, as well as at intervals during the year at staff meetings,” Keller says. “Also, putting the fraud policy on the company’s internal messaging board is a good practice.”