Can Your Firm Lose 5% of it Revenue?

According to a report recently published, the average organization loses 5% of their revenues each year through fraud.  Can you company afford to lose so much this year?

The 2014 Report to the Nations on Occupational Fraud and Abuse (the Report) is published by the Association of Certified Fraud Examiners.  The Report compiled survey responses received after asking over 34,000 fraud examiners for information related to losses at corporation that occurred through fraud.  1,483 responses comprise the analytic foundation for the Report.

The Report outlines a number of key findings and statistics.  Here are a few of the highlights that are relevant to risk management at your company:

  • -The median loss caused by fraud was $145,000.
  • -The mediation duration of the fraud was 18 months
  • -“Asset misappropriation” was the leading cause of fraud and occurred in 85% of the cases
  • -Organizations that had an employee hotline to report fraud were more likely to catch the fraud early
  • -Smaller companies suffered a large amount from occupational fraud
  • -Collusion of employees allowed them to skirt around internal controls

As a start-up, you may not have any revenue or employees that can steal from the company.  But this will not always be the case.  As a company grows and employees are hired, it is important to place safeguard in place and these should be considered even now.  Theft by employees can cause a firm to miss earning targets, lose key investors and cause time to be wasted as the mess is cleaned up.

Companies can safeguard themselves in two primary ways: internal controls that prevent fraud and secondly, through insurance.

Internal controls can be as simple as dual signatures on checks and as complex as an IT infrastructure that independently monitors all transactions and flags abnormal behavior.  restricting access to checkbook and company credit cards should be done by all firms.  It is also wise to have an independent accountant review or audit the financial statements periodically to prevent an employee from creating fake entries.  Finally, having a hotline for employees to report suspected fraud can lead to discovery of unwanted actions as can a vigilance on behaviors that may indicate theft such as large purchases by an employee who does not have a high salary.

Even with these safeguards in place, employees still steal from the company and are usually caught after some time.  For this reason, insurance is necessary.  Fidelity insurance (also called crime insurance or employee dishonesty insurance) will reimburse a company when monies are stolen by employees.  The insurance company then litigates against the thief while you are freed to go back to building your company.

Fidelity insurance should be purchased as company revenues grow and as financial transactions are delegated to employees rather than being handled by owners/officers.  The premium is reasonable, often less than $1,000 a year for a small firm.  Limited coverage can often be negotiated into a business owners package policy.

Contact us to discuss whether this insurance makes sense for your company.