Five percent of a company’s annual revenues are lost to fraud each year. On average, 22 percent of cases had losses of $1 million or more.
Fraud has a sweeping impact on an organization. So what is the best way to prevent it? It all starts with a difficult conversation.
Starting a difficult conversation is never an easy thing to do, and many people avoid starting them for that reason. Even though the conversation is in the best interest of the organization, some people just can’t ask difficult questions. Yet sooner or later, everyone will be confronted with the need to have that difficult conversation with someone in the workplace. For those who handle areas of sensitive information within a company, or as an external vendor, these conversations are vital in the fight against fraud. This could include accounting staff, auditors or attorneys.
Types of Conversations in Relation to Fraud
For accounting staff, difficult conversations normally revolve around questionable activity in the book keeping or bank accounts. When it comes to protecting your company’s finances, these financial conversations may revolve around the conduct of a “trusted” long-term family member or employee. The stress level and uncomfortableness of this difficult conversation just went up another notch.
Business owners are also not immune from having these types of conversations, especially when the topic revolves around a similar employee. Some shy away from discussing any money concerns because they don’t wish to confront a trusted employee or appear to be micromanaging the business.
The problem with that thinking is, even if the impact on the business is minimal at first, if not identified and corrected the financial impact on the business could be significant and possibly close its doors.
Did you know?
Small businesses are hit especially hard when fraud occurs, losing almost twice as much as businesses with more than 100 employees.
The Role of Business Advisors in Fraud Conversations
Accounting and legal staff, whether internal or external, have unique insight into a business and its proceedings. It is essential to their jobs that they ask the difficult questions.
Asking difficult questions doesn’t mean you’re letting anyone down because you don’t already know the answer. Questions are designed to get answers and additional information about a topic that is unclear.
Asking tough questions is also necessary. The client may not be aware of the issue. A simple conversation may open an entirely new line of conversation and allow them to begin to take steps necessary to fix broken systems, lack of internal controls or general fraud concerns.
Financial information can uncover the secrets behind fraud.
Sometimes these questions may not be well received. A colleague once had a client who was convinced there was no issue because the employee in question was a long-time, trusted employee who would never do anything wrong. Despite multiple conversations regarding unusual activity in the accounting records, the client wouldn’t listen. In the end, the client decided our services were no longer necessary.
Our job as a “trusted advisor” is to tell our clients what they need to know, even when they don’t want to hear it. We don’t always have control over their reaction, or what they’ll do with the information. But we must provide all relevant information and allow the client to determine the best course of action.
Providing all necessary action will also protect you in the long run. Should the client claim you or your company knew about questionable activity and did nothing, you have a documentation to the contrary.
As for the client mentioned above, a short time after they canceled their engagement with my colleague, they called my colleague back to apologize for their behavior and ignoring suggestions of questionable activity. We later found that the employee in question had been manipulating their position to embezzle a large amount of funds from the company.
The Importance of Difficult Conversations in the Fight Against Fraud
When potential issues or questionable financial activity is identified, it is always best practice to inform the client of these potential issues. These issues should never be ignored or kept from the client. By enlightening the client, it leaves the decision on how to move forward with the information up to them and not you.
By providing this information to the client, it diminishes the potential of accusations being made against your organization for missing or ignoring inappropriate activity. In turn, it keeps your organization and its reputation out of the news and perhaps the courtroom.
Several years ago, two accounting firms responsible for conducting yearly audits for Dixon, Illinois, were accused of missing employee theft that went on for more than 20 years. This embezzlement cost the city $53 million in taxpayer funds. The lost money hampered the town’s ability to carry out some of its desired improvements and cut services to citizens. The town filed a civil claim against these two accounting firms. At the end of the trial, the court ruled the accounting firms were required to repay Dixon over $40 million for their involvement in missing this long-running embezzlement.
It begs the question, were the difficult questions asked by those with the ability to do so? Could this embezzlement have been uncovered years earlier and the citizens of Dixon not been victimized? Remember to do your part and ask.
Prevent Fraud Before it Starts