Fraud Prevention and Training

Declining corporate and individual ethics are significant challenges for businesses today. According to the Association of Certified Fraud Examiners 2009 Report to the Nation (the Report), fraud cost U.S. organizations $660 billion annually. Fraud is more common at smaller organizations (those with fewer than 100 employees) have the most fraud, with median losses of $98,000. This is the highest loss except for the largest companies (those with more than 10,000 employees). It is also for more difficult for small entities to survive after fraud losses. Additionally, while the media reports on the financial misstatements of the Worldcoms and Enrons, in the majority of cases studied, 93% of the cases involved theft. Corruption accounted for 30%; and financial statement misstatement, at 8%, was the smallest category of offense. Fraud is a very real risk for your business. Add to the fraud equation the declining individual ethics, such as 22% believe lying or cheating does not hurt their character, yet 44% are not satisfied with the ethics and character of their peers. So what can you do to prevent fraud?

Fraud prevention can be anchored around two guideposts - strong internal controls and a hotline. Internal controls are the single most effective measure to assist in deterring fraud. A hotline is the most effective method to detect fraud.

An internal control review can suggest cost effective ways to strengthen your internal controls. For most small businesses, common weaknesses are inadequate reviews of transactions and the lack of account reconciliations. We have assisted numerous governmental, nonprofit, and private industry clients in their design of efficient and effective internal control procedures to detect fraud timely, and to prevent fraud from occurring.

Most fraud is exposed as a result of tips and complaints by other employees. The 2009 Report to the Nation showed that fraud was much more likely to be detected by a tip than by more traditional methods such as internal audits. An interesting note is that in frauds committed by owners and executives, which are generally the most expensive, over half the cases were identified by a tip. The Report also found that having a hotline can reduce fraud losses significantly from a loss of $135,500 for organizations without a hotline, down to a median loss of $56,500 for organizations utilizing a hotline. Another interesting fact in the Report was the importance of the hotline being available to third parties such as vendors and customers.

We can provide ethics training and assist you in setting up a hotline. We offer a hotline service though an affiliated company. Please see the website at This website utilizes a confidential reporting process where an employee would provide information about a transaction. We would work with the company to research the alleged transgression and seek to improve the situation by identifying what has happened, why it happened and how to prevent it from happening again.

What if you think a fraud has already occurred? Russell CPAs has performed forensic fraud auditing services and provided expert witness testimony in a variety of engagements, such as those listed below:

  • Attorney General investigation of illegal payments to federal government workers and officials from top management in a multi-national aerospace company.
  • FBI investigation of illegal Medi-Care claims submitted by a nursing home.
  • California State Department of General Services investigation of an energy provider to identify "hidden assets" that may be available to reimburse the state for advances it paid to the provider in trust for other agencies prior to its bankruptcy.
  • Local special district investigation of payroll irregularities.
  • Numerous investigations of opposing spouses' financial records to detect under-reporting of income and to identify hidden assets in connection with divorce litigation.
  • Investigation of embezzlement of policyholder premiums by an employee of a local insurance agency.

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