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These Numbers Make the President’s Plan Look Small

General Business News

February 2003

These Numbers Make the President’s Plan Look Small

$674 billion dollars... $674 thousand-million dollars…$674,000,000,000! This nation can’t afford a loss like that Mr. President!

This sounds like a recent headline, doesn’t it. Well, don’t worry, we’re not going to get into tax policy debate here. We give you this number only as a point of reference. Add this to the 2001 tax cuts and the total of the actual and proposed cuts in the last two years (the “Bush Plan”) is $2 trillion over the next 10 years. Keep these numbers in mind.

Would you believe these numbers pale when compared to the estimated cost of fraud and embezzlement each year? Let’s take a look at the numbers based on the report 2002 Report to the Nation, Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners:

  • In 2002, the ACFE estimates occupational fraud cost American businesses $600 billion. If you multiply that by the 10 years of the Bush plans, that’s $6 trillion or 3 times the reduced revenue from the Bush tax reductions. Since fraud losses go directly to the bottom line, the income tax on those losses would be enough to replace the combined $2 trillion tax loss under the Bush plan.

  • There are three types of occupational fraud: asset misappropriations, corruption and fraudulent statements.

    • Asset misappropriations are the most common (80% of all schemes). Cash is the preferred target in 90% of the cases.

    • Corruption accounts for 13% of fraud losses. The cost of an average loss is $500,000.

    • Fraudulent statements come in at 7% of total schemes, but cause the largest average loss of $4.25 million.

  • Most fraudulent schemes are uncovered because of tips form another employee, customer, vendor or other source.

  • The typical thief is a first-time offender. Repeat offenders account only for 7% of fraudulent schemes.

  • Don’t make the mistake of thinking your small business is immune to fraud…well, that is unless you are the only employee. The average loss to small businesses in the study was $127,500 while the average for the largest companies in the AFCE study was only $97,000.

  • Many fraudulent schemes are perpetrated by long-time trusted employees.


Have we gotten your attention yet? What if we told you that the estimated annual loss in the AFCE’s 1996 study was $400 billion? In six years, the average loss has increased by 50%. Just to give you another statistic, the Consumer Price Index increased by only 14%. This would suggest that occupational fraud is increasing in scope as well as dollar value. This is an alarming trend. How much will it be in the next study?

The AFCE report found that organizations with fraud hotlines reduced their losses by 50%. Significant reductions in fraud loss were also realized from the presence of internal auditors, external auditors and background checks.

The key in any fraud prevention program, however, is diligently following good accounting procedures. Some of the more common safeguards are:

  • Establishing good internal accounting controls by splitting employee duties that, if assigned to one person, would allow them to commit and cover up a fraud;

  • Secure blank checks, don’t use signature stamps and never sign or countersign checks in advance;

  • Have customer deposits sent to a lock box instead of your company;

  • Don’t use company credit cards;

  • Establish a fraud hotline or similar mechanism;

  • Always check references and the professional credentials of potential employees;

  • Mark company equipment with a permanent identification number to limit it’s marketability;

  • Don’t rely solely on annual audits to find fraud;

  • Make sure you have adequate insurance to cover employee fraud;

  • Make employees take their annual vacations.


This article has discussed only occupational fraud, including fraud caused by intentionally misstating operating results to creditors and investors. We haven’t even discussed checks that bounce through the stratosphere, credit card fraud or identity theft. Can you imagine the combined cost of all types of fraud? It’s mind-boggling and, frankly, whatever action you take will only be a drop in the bucket toward controlling this blight on our society. We bet, however, that “drop” would be significant to you.

We strongly urge you to take a look at your operations to see if there are any holes that would allow fraud to flourish in your business. Sometimes, being too close to the company and employees can be a detriment and you need an objective look at your controls. When that happens, give us a call. With our experience and training we are uniquely qualified to help you find potential cash leaks.

Now that we’ve told you there may be fraud in your organization, have a terrific February!
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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