Could your organization become a victim of lifestyle fraud?
By Chris Mennel, CPA, senior audit manager, Alerding CPA Group
Sometimes it begins with “borrowing” a small amount of money, as a temporary loan from an employer. He or she may be thinking, “I really need this money and I’ll put it back when I get my paycheck,” or “I just can’t afford to lose everything – my home, car, everything.” Or the employee is living beyond his or her means and wants to support an extravagant lifestyle.
Regardless of the rationale, lifestyle fraud is very real. And small businesses and nonprofit organizations are especially vulnerable.
For example, an employee was involved in an accident resulting in several injuries while also experiencing marital troubles at home. As a result of the injuries, the individual was prescribed narcotics for pain management. She became dependent on the narcotics as a way to relieve her pain and escape her marital troubles. The employee began spending a large amount of money in order to obtain narcotics, which lead her to steal from her employer in order to make ends meet, resulting in a six-figure loss to the organization.
It’s easy to point the finger at this individual and cite statistics about fraud, but what if we could rewind the clock and encourage management to identify this individual as a potential fraud risk. The organization’s management could have then reviewed internal controls making sure that stealing wasn’t an option. It sounds difficult to do, but the personal stresses mentioned above were well-known by management.
Don’t be a victim
In 2018, according to the Association of Certified Fraud Examiners (ACFE), 28 percent of employee fraud happened in small organizations, the highest number among all employer categories. Small organizations, less than 100 employees, are the most susceptible, because they lack the resources to implement complete systems of internal controls and properly segregate accounting duties among their limited staff.
The types of frauds include corruption, check tampering, skimming, billing and expense reimbursement fraud. Nearly half of the perpetrators were trusted employees who had been with the company from four to five years, worked in the accounting area and were first-time offenders. The median financial loss to these smaller companies was $200,000, the largest among victimized organizations of all sizes.
How to identify lifestyle fraud
Could lifestyle fraud happen to your company or organization?
Here are some signs:
1) Expensive purchases, which were previously out-of-the ordinary for this employee
2) Personal debt and credit problems
3) Behavioral changes indicating drug or alcohol abuse
4) Refusal to take vacation or sick time and refusing promotions for fear of detection
5) Carrying large amounts of money
6) Unwillingness to share accounting responsibilities
7) Uneasiness when being questioned about accounting records
How to stop it before it starts
There are many ways to prevent lifestyle fraud in your organization or business. Here are some strategies:
1) Review your financial process and tighten controls
2) Make sure more than one person has complete control over an entire cash receipts or cash disbursement process
3) Approve every transaction by someone other than bookkeeping
4) Review bank statements by someone other than bookkeeping
Chris Mennel, senior audit manager at Alerding CPA group, oversees audit and accounting services, nonprofit and consulting services. Since joining Alerding CPA Group in 2006, Mennel’s clientele has grown to include several of the firm’s larger for-profit clients as well as approximately 20 nonprofits located throughout Central Indiana. He also prepares financial statement projections and other financial analyses to assist clients with their financing needs.
Lifestyle Fraud can be prevented with the proper controls and processes. If you need help setting them up or would like to discuss a specific concern within your organization, contact Alerding CPA Group at (317) 569-4181 or www.alerdingcpagroup.com