Someone Got Their Hands in Your Cookie Jars?

Fraud is not as easy to detect as some may think, even if the culprit goes to drastic lengths to conceal their crime. As technology advances the methodology of crime has evolved, lending those who would capitalize on others a veritable arsenal to achieve their unscrupulous ends. It takes internal auditors roughly twelve months on average to conduct a thorough investigation of fraud and twenty-four months for an external audit, therefore preventing and discovering embezzlement early on is absolutely paramount.

According to the 2016 Report to the Nations issued by the Association of Certified Fraud Examiners (ACFE), upon reviewing 1,038 cases, it takes about five months on average for active surveillance and monitoring to detect fraud as opposed to thirty-six months through passive detection by notifying the police.

The corresponding median losses depict the wide disparity between these two modes of detection as well, reporting a median loss of $48,000 through active detection versus $1,000,000. The difference is striking, and requires companies to take a more proactive approach in prevention and discovery.

While the average claim for embezzlement filed with the CSD Pool is $300,000, the average policy limit most districts have is only $25,000. There have been eight claims of embezzlement in the last decade, so if those districts only carried the average, the vast bulk of those claims was left under insured.

So, what can your district do to safeguard against embezzlement?

Empower Your Employees

Curiously enough, employees are shown to be the most common source of fraud detection, outclassing customers, vendors, and shareholders by a staggering percentage. Given that the chances of exposing scams primarily depend on the employee, a company’s culture serves a pivotal role in reinforcing ethical business practices.

It’s imperative that everyone in your district holds each other accountable, not just employer to employee. Taking into consideration the corollary between the dollar amount a company stands to lose and a fraudster’s role within the company, employees and lower-level management staff can’t afford to recuse themselves from reporting suspicious activity. It is also important to focus on fostering an inclusive community of open communication and honesty across all departments to prevent insularity and isolation.

According to the ACFE report, the majority of tips received originate from non-employees like vendors and customers. We recommend including hotlines in your respective websites and business profiles. Not only does it serve as a potential deterrent for scams in your district, it also reinforces your district’s own transparency and willingness to uphold ethical business. Keep in mind, however, that not all fraud hotlines are created equal; some are run by call centers with inbound service contracts to businesses. We highly stress going through the proper governmental channels with your reports.

Finance the Risk

Investing in higher crime coverage limits may feel unnecessary, a precautionary measure for businesses who require additional security due to an established precedent. This sort of reasoning is commonplace, a case of “that sort of thing happens to other people,” especially if your special district has never been exposed to fraudulent abuse.

However, the alternative can end up costing your district far more; in the past, there have been cases of misappropriated funds costing districts up to millions of dollars, and when losses far exceed the coverage limit, the district itself is held accountable. Don’t wait for something to happen before investing in higher crime coverage. It may be too late if and when it happens.

Connect to Outside Authorities

The ACFE’s Report to the Nations has found that a whopping 47.3% of fraudulent cases were detected by organizations with hotlines as opposed to a mere 28.2% detection rate from organizations without. Having an available avenue for tippers to relay their findings can mean the difference between spending half-a-year investigating an embezzlement scheme or three years. However, your special district may not have the resources to create an in-house tip line service. If this is the case, consider the following available resources:

  1. Colorado Attorney General’s Office: From disaster and mail fraud to digital and Medicaid fraud, the state’s Attorney General’s Office website provides a number of different online submission forms organized for your convenience. There is a contact number available, but it appears that the office exclusively relies on its online forms for fraud reports. You can view it here.
  2. Federal Bureau of Investigation: Depending on the severity and scope of the crime, sometimes it pays to fall back on the big guns. The FBI has an online submission form for tips and leads. However, the site also attaches a disclaimer that though your submission will be reviewed, in some cases, you may not receive a response given the sheer amount of information they receive and process. You can file a tip at their website.

Utilize Checks and Balances

Separation of duties is a preventive measure often overlooked, especially in businesses operating with smaller staff. There have been many embezzlement cases in the past that could have been avoided if a few additional steps had been implemented to the accounting process, such as requiring additional verification from another individual or necessitating weekly backups for record-keeping.

Considering that most fraud perpetrators are first-time offenders with no criminal records, dividing financial responsibilities and including additional roles for the purpose of greater oversight can potentially dissuade the aspiring fraudster.

Don’t Be Afraid of Bad Publicity

Sometimes, it’s better to embrace bad publicity than to keep it in-house. The ACFE’s 2016 Report to the Nations has found that the majority of cases referred to law enforcement resulted in a finding of guilt by an incredible 76.5%, whether by conviction at trial or the defendant pleading guilty. Despite this, the number of cases submitted for prosecution has steadily waned over the years, the number one reason being that the victim company fears bad publicity. This is perfectly understandable, especially if the victim company feels that their internal discipline is adequate enough to address the severity of the crime or a private settlement can be reached with limited damage.

However, a large percentage of victim companies need a significant amount of time to recoup, and more than a few never truly recover from their losses. This is further exacerbated by businesses with limited crime coverage. Involving law enforcement should always be an available option, even if just for the purpose of sending a strong message about your district’s stance on fraud. Unfortunately, the threat of termination may not be enough of a disincentive to keep fraudsters at bay.

Your district has five ways of combating embezzlement: creating an inclusive community in the workplace, investing in higher limits of crime coverage, including tip lines in your respective websites and business profiles, ensuring a separation of duties is in place, and considering the intervention of law enforcement.

We cannot stress the importance of these measures, particularly in the investment of higher limits. All too often in the past, there have been claims with insufficient limits, resulting in the termination of jobs and services. If you would like to receive a quote for higher crime limits, please contact us. Renewal is the perfect time of year to ask for an increase in any limit, especially Crime.

The owner of this website has made a commitment to accessibility and inclusion, please report any problems that you encounter using the contact form on this website. This site uses the WP ADA Compliance Check plugin to enhance accessibility.