Minniti CPA | Is Your Financial Plan Susceptible to Occupational Fraud?
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Is Your Financial Plan Susceptible to Occupational Fraud?

Is Your Financial Plan Susceptible to Occupational Fraud?

Robert Minniti, CPAWhen we consider our financial plan for the future, we use diversification as a way to reduce the risk of fraud in our portfolio.  We understand the risks of financial statement fraud in our portfolio.  We understand the risks of financial statement fraud such as Enron and Ponzi schemes like the one conducted by Bernie Madoff.  What we sometimes fail to remember is that our company is usually our single biggest investment and it is difficult to diversify our investment in the firm as a partner or sole proprietor.  Therefore, we need to consider the risk of fraud affecting the companies we own.


CPAs, like many business owners, concentrate on the external operations of the businesses–obtaining new clients and providing services to existing clients–and often pay less attention to the internal “non-client directed” operations.  Over time, management gets complacent on enforcing the internal controls of the organization and puts excessive trust in their employees.  These rusted employees then have the opportunity to commit occupational fraud and misappropriate the assets of the business.  Employes are also often allowed to be in a position to make business decisions when their personal interests are in conflict with the company’s interests.


The Association of Certified Fraud Examiners (ACFE) reported in its 2010 Report to the Nation on Occupational Fraud & Abuse that, on average, an occupational fraud is perpetrated for 24 months before being discovered.  Further, the median loss due to occupational fraud for private companies was $231,000 in 2009.  they also noted that smaller organizations of less than 100 employees are the most frequently victimized and suffered the highest median losses from fraud.  The report indicated that the five most frequently perpetrated fraud schemes discovered at small businesses are: billing schemes, check tampering, corruption, skimming and expense reimbursement fraud.


In another study, Occupational Fraud: A Study of the Impact of an Economic Recession, the Association of Certified Fraud Examiners reported hat over 55 percent of organizations had seen an increase in employee fraud and 48 percent had seen an increase in the amount of losses due to fraud since the start of the current recession.


The report further stated that employees pose the biggest risk of fraud to an organization and, with the current economic conditions, employees are under more pressure to commit fraud and, due to layoffs, reduced hours, pay cuts, furloughs, and benefit reductions, it is easier for employees to rationalize the decision and defraud their employer.


A generally accepted concept for occupational fraud is the Fraud Triangle, which indicates that three conditions must be present for an employee to commit fraud against their employer.  First, the employee must have some form of economic pressure on them that requires a need for more money  than they currently have.  This could be the result of medical bills,  home in foreclosure, past due loans, drug addiction, or gambling problems.  Because of the current economic recession, the pressures on employees are extremely high.  the second thing necessary for fraud to occur is rationalization.  The employee need to be able to rationalize that their behavior is necessary or that they had no other choice but to commit the fraud.  The final condition is opportunity.  The employee must have the ability and opportunity to commit the fraud.


Although firms can do nothing to affect the pressures placed on an employee, and little to affect an employee’s ability to rationalize their behavior, employers do have the ability to control the employee’s opportunity to commit fraud.  This can be accomplished by having good internal controls that are enforced and frequently monitored.


The association of Certified Fraud Examiners study shows that some of the best internal controls for reducing occupational fraud are: appropriate segregation of duties, surprise audits, fraud training for managers and employees, job rotation and mandatory vacations, a fraud hotline, employee support programs, internal audits, a written anti-fraud policy and a written code of conduct.


With this in mind, even the best financial plans can go awry if the business owner has neglected to install and monitor a proper set of internal controls over his or her business.  Therefore, it is recommended that business owners take stock of their current procedures and beef up those areas where little or no internal controls exist to reduce the opportunity that employees have in committing fraud.  This will help ensure that their financial planning efforts have a better chance of succeeding.


AZ CPARobert Minniti, CPA, CPE, Cr.FA, CVA, CFF, DABFA, MBA, is the president of Minniti CPA, LLC and is an adjunct professor at several universities where he teaches graduate and undergraduate classes in accounting, fraud, and forensic accounting.  He is a Certified Fraud Examiner, Certified Forensic Accountant, Certified Valuation Analyst, and is Certified in Financial Forensics.  He is also currently serving on the Executive Advisory Board of the American Board of Forensic Accounting. 

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