Pub. 3 2014 Issue 2

Fall 2014 27 The Report to the Nations on Occupational Fraud and Abuse for 2014 has some grim statistics you should be aware of: • The typical business loses five percent of its revenue to fraud every year. That’s a nice low percentage, right? Here’s the problem: on a global basis, that works out to a potential fraud loss of almost $3.7 trillion. • The median amount of money lost was $145,000, but 22 percent of the cases involved a minimum loss of $1 million or more. • The median amount of time between the beginning of a fraud and its detection is 18 months. • It’s hard to get the money back. Fifty-eight percent of the victims who were surveyed for the report had not gotten back any of their money; only 14 percent recovered everything. • Seventy-seven percent of all frauds occur in just seven depart- ments: accounting, customer service, finance, operations, pur- chasing, sales, and either upper management or executive management. • The smaller the business, the greater the impact of the losses that take place. Small businesses face specific fraud risks and have disproportionately large losses. Losses rise as a result of two things: the involvement of highly placed individuals in the fraud, and collusion between employees carrying out the fraud. • Employees are responsible for 42 percent of occupational frauds, with a median loss of $75,000. For middle managers, the percent is 36 percent, but the median loss rises to $130,000. For owners or executives, the percentage is only 19 percent of all cases, but the median loss is $500,000. • Collusion has a similar effect. If one employee commits fraud, the median loss is $80,000. For two perpetrators, the median loss goes up to $200,000; for three, it is $355,000; for four or more, it is more than $500.000. How can you protect your dealership? Putting in anti-fraud controls has a significant effect. It reduces potential losses and shortens the length of duration for the fraud. Just trying to stop fraud, in other words, is enough to make fraud less expensive and to shut it down more quickly. WHAT ARE SOME SPEC I F I C ANT I - FRAUD CONTROLS? • Set a good example. The behavior of people at the top is copied by everyone else. If you’ve ever seen the difference caused by two very different people managing exactly the same people, you know this already. A good example does make a difference. • Train people so they know what the warning signs are. If you or someone else sees a warning sign that might indicate fraud, don’t make hasty assumptions. Look at it more as a reason to examine the situation a little more thoroughly. • Rotate jobs and have mandatory vacation policies. • Put in a tip line, and then advertise it on a regular and frequent basis. It will probably cost you something between $500 and $2000 per year, which is a bargain compared to what you could potentially lose. • Even thoughmanagement reviews and a combination of internal and external audits are not as effective as having a tip line, that doesn’t mean they are worthless. Make sure reviews and audits are a regular part of dealership life. Since approximately 40 percent of all fraud cases are detected because someone gave a tip, that makes it at least twice as effective as any other method; the frauds uncovered through a tip line are 41 percent less expensive to the business as frauds uncovered by different methods, and the tips mean fraud detection takes place 50 percent faster than would be the case otherwise. Almost 50 percent of those tips come from employees, so don’t just put up a poster in the lunch room. Actively talk about your tip line with employees and vendors who work with your dealership. Make the tip line part of new-employee and new-vendor orientation. Can you prevent fraud by screening employees carefully? Unfortunately, the answer to that question is a strong“no.”Most peoplewho commit fraud are first-time offenders, and many of them have worked for a particular employer for years before beginning to steal. It’s more helpful to rely on employee monitoring, the presence of risk factors, and the warning signs than it is to rely on screening. Ninety-two percent of the time, fraud is preceded by at least one behav- ioral trait that indicates potential trouble. In 64 percent of the cases, there were multiple indicators. What should you be looking for? The following list, compiled for the 2014 Report to the Nations on Occupational Fraud and Abuse, identifies what to watch for, and includes the most recent percentages of perpetrators who demonstrate the behavior: • Someone livingmore lavishly than seems reasonable (43.8 percent) • Financial problems (33 percent) • A particularly close relationship with a vendor or customer (21.8 percent) • Control issues and an unwillingness to share job duties (21.1 percent) • A “wheeler-dealer” attitude (18.4 percent) • Marriage problems, divorce, or other problems at home (16.8 percent) • Bad temper, suspiciousness, or defensive behavior (15 percent) • Addiction issues (11.6 percent) • Complaints about not being paid enough (9.4 percent) • Previous problems with employment (8.9 percent) • A refusal to take a vacation (8.6 percent) • A pressured work environment (8.4 percent) • Social isolation (7.4 percent) • One or more complaints about not having enough authority (6.5 percent) • Pressure from family or peers who want an employee to succeed (6 percent) • Unstable life circumstances (5.9 percent) • Previous legal problems (5.6 percent) You can’t stop people from making bad decisions that could do substantial damage to your dealership, but you can do a lot to improve your chances of detecting problems and putting a prompt end to any theft that might take place. In a still-uncertain economy, that is good news for any business.