cpa firms have opportunities here. bonus: infographics.
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covid-19 isn’t the only pandemic ravaging the world. there’s a financial virus going around, too.
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it’s called fraud – maybe not contagious, but it pops up everywhere. on average, an estimated 5 percent of the world’s revenue is lost to fraud each year, a median loss of $125,000, an average loss of $1,509,000.
the prevalence and seriousness of fraud is both opportunity and obligation for cpa practices, not to mention internal audit departments.
according to the 2020 global study on occupational fraud and abuse, just issued by the association of certified fraud examiners, external audits were the source of detection in only 4 percent of 2,504 organizations analyzed in 125 countries. internal audits accounted for 15 percent of detection, and internal controls seem almost not worthwhile, finding only 2 percent of cases of known fraud.
despite increasingly sophisticated fraud detection techniques, tips are still by far the most common way fraud is discovered, responsible for 43 percent of detected cases.
opportunities in fraud awareness training
in that tips are the most common revealers of fraud, facilitating and enabling tips is a significant opportunity for accounting practices. they can support clients by training employees to find and report fraud. the study found that about half of tips came from employees.
in organizations with formal reporting mechanisms, 56 percent of tips came from employees with fraud awareness training. only 37 percent came from employees without training.
proactive anti-fraud controls are becoming more common. in the last decade,
- use of hotlines increased by 13 percent
- anti-fraud policies increased by 13 percent
- fraud training for employees increased by 11 percent
- fraud training for managers and executives increased by 9 percent
opportunities for third-party consultants
the acfe study found that only 28 percent of whistleblowers reported fraud to their direct supervisors. only 13 percent went to the owner of the company or a board of directors.
fourteen percent went to a fraud investigation team, which often included external auditors. the percentage seems low because of the relative scarcity of such teams.
whistleblowers can be reluctant to report fraud and other issues, such as safety problems and harassment, to people in their own company. they may be more willing to talk with a third-party consultant, such as an independent cpa firm. companies serious about fraud prevention and employee satisfaction may be interested in contracting a cpa firm to not only educate employees but serve as a competent and impartial receiver of tips.
opportunities in internal control
client organizations might also need consultation on internal controls. a lack of adequate internal controls contributed to nearly a third of frauds. the study found that the presence of anti-fraud controls is associated with lower fraud losses and quicker detection. a cpa firm is a logical place for consultation on establishing controls and strengthening internal audit departments.
opportunities in small businesses
cpas with small business clients can focus on three areas where fraud is substantially more common than in large organizations. billing and payroll fraud are twice as high in small businesses. check and payment tampering is four times higher.
just kidding, but …
businesses large and small could prevent a lot of fraud by firing all male employees. not only did men commit 72 percent of all fraud, but they stole almost twice what women stole: $150,000 compared to $85,000.
companies might as well fire their owners and top executives, too. though they represented only 20 percent of fraud cases, they caused the largest losses – $600,000 was the mean loss, compared to a mere $150,000 swiped by managers and $60,000 by other employees.
or maybe companies should simply fire everybody, because fraud happens throughout organizations. in companies with fewer than 100 employees,
- 30 percent of fraud was in billing
- 22 percent was in check and payment tampering
- 20 percent was in expense reimbursements
- 17 percent was in payroll
- 15 percent was from skimming
- 14 percent was financial statement fraud
if firing all males, all owners or all employees is not an option, companies would do well to beef up their efforts at fraud prevention and detection. cpa firms can play an essential – and profitable – role in that effort.