Fraud is Everywhere—Is Your Business Next?

“It can’t happen here.”

“My employees would never steal from me.”

“I would know if something was going on.”

These are just some of the mindsets that organizations have had before falling victim to fraud. The truth is that fraud is widespread and occurs in all industries and all sizes of organizations. The following chart from the Association of Certified Fraud Examiners’ (ACFE) most recent Report to the Nations reflects the frequency of fraud cases by industry. As you can see, the banking and financial services industry reported more cases of fraud than all other industries and was nearly double the next closest industry.



According to the ACFE, as high as 60 percent of employees would steal from their employer if faced with enough pressure and the opportunity was available to them. With these alarming statistics, how is an organization supposed to protect itself? It starts with being aware that no organization is immune, knowing what fraud schemes are currently occurring in your industry and then ensuring your organization has the proper internal controls in place.

Common Schemes

The two most common fraud schemes in the banking and financial services industry are corruption and cash schemes. Understanding how these schemes are conducted will give you the inside knowledge on how to detect when one may be occurring or prevent them entirely.

Corruption schemes are carried out when an employee misuses his/her influence in a business transaction in order to gain a personal benefit, in an action that is in violation of the duty they owe their employer. An example would be a loan officer receiving a kickback payment from the customer in exchange for a favorable outcome on the loan. These can be difficult to detect as the “benefit” often will not run through the bank’s financials and is often paid in cash “under the table.” However, paying attention to close relationships between loan officers and specific borrowers, as well as understanding the employee’s lifestyle to see if they are living beyond the reach of their paycheck, will help detect these schemes.

Cash schemes are relatively simple and involve an employee’s theft of the bank’s cash. These can occur by an employee stealing money from the bank’s vault, ATM machines or in the account opening process for depository accounts. They are often concealed by lack of internal controls and with false documentation to balance out accounts. Surprise audits, job rotation and proper segregation of duties will help detect and prevent these schemes.

Internal Controls Necessary

The ACFE’s Report to the Nations outlines that the number one reason fraud occurs in an organization is due to lack of effective internal controls. To reduce the risk of fraud within your organization, take time to understand your vulnerabilities and implement the proper anti-fraud internal controls. As Ben Franklin once said, “An ounce of prevention is worth a pound of cure.”


Fraud: Current Trends and Information

Trillions of dollars of revenue worldwide is lost due to fraud. According to the Association of Certified Fraud Examiners 2016 Report to the Nations on Occupational Fraud and Abuse, 5 percent of annual revenues are lost to fraud–that is $3.7 trillion worldwide. While the median loss was $150,000, 23 percent of cases involved losses of greater than $1 million. Typically, smaller organizations suffer the larger losses. It is important to be aware of the current trends in fraud so your company can avoid occupational fraud and abuse.

In 83 percent of fraud cases, the fraud involved asset misappropriation. Most frequently victimized were private companies and those in the banking and financial services industry. While employees were typically the perpetrators, owners and executives were the ones who generated the largest fraud losses. The primary weakness in many of these cases was lack of internal controls.

An example of poor controls in a small business can be seen in an actual fraud examination performed by Eide Bailly. The bookkeeper for a tile company was responsible for daily tasks including collecting sales receipts, completing deposit slips and making deposits. After a period of time, the bookkeeper began to remove checks and hid them in her desk. Later, when the daily sales included an amount of cash that matched one or several of the checks which had been set aside, the bookkeeper exchanged the cash for checks and made the daily deposit. No one in the company was aware the cash was missing until it was discovered revenue numbers would not reconcile. By the end of the scheme, the business lost more than $150,000.

Some simple controls could have prevented this scheme. Businesses should consider:

  • Using a hotline
    One way to stay on top of fraud cases is through the utilization of a hotline. More than a third—39.1 percent—of fraud cases were detected by a tip line, and in 51.5 percent of cases, employees were the source of the tip. Organizations with a hotline are 50 percent quicker at detecting fraud. Hotlines are beneficial for both the employer and the employee due to ease and anonymity.
  • Establishing preventative controls
    Preventive controls include deterring or preventing unauthorized transactions, requiring proper authorization, and instilling physical safeguards such as locks, keys and passwords. Another important preventative control is segregation of duties. Proper segregation of duties is imperative because when one person controls multiple phases of a transaction, the opportunity for fraud increases significantly. Nearly two-thirds of all frauds are committed by one person acting alone. By involving at least one other person, the risk of fraud can be greatly reduced. For example, having a second individual involved in documenting and verifying vendors can impact someone’s ability to introduce a false vendor into the company’s A/P process. One person documents the vendor’s information and a second individual then vets the vendors’ information prior to entering it into the company’s A/P system. This simple control can keep someone from submitting false invoices for services never rendered or requested. In one of our previous examinations, an A/P clerk used this specific scheme to embezzle $170,000.
  • Establishing detective controls
    Detective controls include independent checks to ensure that transactions have proper authority and are recorded correctly. For example, rotating job duties, a mandatory vacation requirement, and surprise audits are effective detective controls. Assuring adequate documentation and records are maintained is also an important detective control. Procedures should be implemented to ensure these detective controls are in place.

With appropriate measures in place, you can successfully decrease the risk of fraud in your workplace. While most frauds are uncovered by accident, it is important to remember to not overlook the most obvious signs. If you suspect fraudulent activity, employ the skills of a forensic accountant for detection and investigation.