M: Business 3rd Edition by O. C. Ferrell, Geoffrey Hirt, Linda Ferrell

Exercise 84

A recent survey reported bad news for business owners. Despite regulations, corporate scandals, and external controls, fraud is still lurking among businesses. In a survey of 1,842 global fraud investigators, the Association of Certified Fraud Examiners (ACFE) revealed that fraud remains difficult to spot. In fact, it can take almost two years on average to recognize that fraud is taking place.

Accounting controls alone are not reliable for catching fraudulent behavior. Instead, it is often up to employees to blow the whistle. The ACFE states that “tip-offs” remain the most effective means of catching a thief, revealing fraud three times as often as traditional reviews and accounting checks and balances. Unfortunately, many employees fear that if they reveal fraud, they will face reprisals from supervisors or fellow employees. This is not totally unjustified; whistleblowers at Enron, for example, were threatened with firing. Only 7.4 percent of companies praise employees who come forward with information.

To curb fraud, therefore, managers must find ways to encourage employees to step forward. One way is to set up anonymous employee hotlines and to ask all employees, no matter how senior, to submit to routine screenings and attend trainings. To be safe, employers should also keep an eye out for lifestyle changes among employees.

An upturn in an employee’s fortunes may point to fraud.

Fraud is not disappearing anytime soon. In the meantime, it is costing U.S. companies median losses of anywhere from $80,000 to $150,000. To keep fraud from taking over, companies would be wise to alter their cultures to provide employees with safe methods for reporting suspected fraud. Vigilant accounting is simply not enough to catch every fraudster.

Why do you think fraud is a significant financial issue in most businesses?

Step 1 of 2

Fraud can have a substantial impact on any business. It can affect business, consumers and employees as well. It has the potential to disrupt the business activity, no matter how big it is. However, smaller businesses are hit harder and cause severe financial loss to it.