Be Vigilant for Employee Fraud Schemes | Plante Moran
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Plante & Moran Cautions Employers: Be Vigilant for Employee Fraud Schemes as Economy Begins to Improve

GRAND RAPIDS, Michigan — As the economy in West Michigan begins to improve, a West Michigan fraud expert from Plante & Moran, PLLC warns that employers need to be even more vigilant to prevent employee fraud – often the largest annual source of loss in their organizations.

Forensic accountant Michelle McHale continues to see local companies be the victims of employee embezzlements, kickback schemes and other related types of fraud in a trend that is born out by a recent national survey from the Associate of Certified Fraud Examiners. She notes that the typical organization will lose 5 percent of its annual revenue to fraud — a global figure that translates to more than $2.9 trillion.

“As the local economy begins to rebound, companies are starting to notice employee fraud again,” McHale said. “While that might seem counter-intuitive, it makes sense when you realize that companies reduced workers to cut costs during the recession. As a result, proper internal controls suffered.

“Now that controls can be reinstated with new hires coming on board, more schemes are being uncovered. The perpetrators can come from throughout the organization — making fraud an equal opportunity crime for several departments.”

The survey noted that:

  • The median loss from fraud is $160,000 and unfolds over the course of 18 months before being detected
  • Small organizations get hit harder by fraud than their larger counterparts, primarily because they lack the internal controls to prevent it
  • More than 80 percent of the frauds come from employees in one of six departments: accounting, operations, sales, upper management, customer service and purchasing
  • Upper management accounts for only 13.5 percent of employee crimes, but the median loss resulting from their shenanigans are the steepest at an average of $829,000
  • While 22 percent of frauds originate in the accounting department, their losses are only slightly above the median
  • When boards of directors, which traditionally provide oversight for the company, are complicit in fraud schemes, the losses tally a median of $800,000.

“Backed by their insurance carriers, companies are being more aggressive in pursuing wrongdoers,” McHale noted. “Our team of fraud examiners continues to be busier than ever — and we expect that to continue as hiring accelerates.”

McHale recommends several steps that employers can take to decrease their susceptibility to fraud while maximizing existing resources. These include:

  • Implement good hiring practices. It is important to perform background checks on potential job candidates, contact references and verify educational degrees. Much can be learned about an individual through confirmation of work history and education.
  • Establish and adhere to a written code of ethical conduct. A concise, strong ethics policy defines improper and illegal behavior, including conflicts of interest, kickbacks, embezzlement, etc. The policy should be given to employees to read and sign at the time of hire, and it should be reviewed with employees annually. Ensure the rules of conduct apply equally to everyone within the firm.
  • Discipline fairly and consistently. Employees and members must understand that there is zero tolerance for improper business conduct or fraudulent behavior and that disciplinary action will be taken for infractions.
  • Implement and monitor internal controls. Proper internal controls require that transactions are properly authorized, recorded and reported and that all assets are safeguarded. Safeguards include securing firm assets within controlled areas, vendor and client verification and random, periodic checks of accounting activities.
  • Training. Offering ongoing training to employees is important to keep them apprised of what constitutes fraud and how it is prevented, detected and reported.

About Plante & Moran, PLLC
Plante & Moran is among the nation’s largest certified public accounting and business advisory firms, providing clients with tax, audit, risk management, financial, technology, business consulting, and wealth management services. Plante & Moran has a staff of more than 1,600 professionals in 21 offices throughout Michigan, Ohio, and Illinois with international offices in Shanghai, China; Monterrey, Mexico; and Mumbai, India. Plante & Moran has been recognized by a number of organizations, including FORTUNE magazine, as one of the country’s best places to work.

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