Welcome to The CPA Journal Archives

Visit cpajournal.com to read the very latest from The CPA Journal


Fraud Mitigation

The Last Great Profit Opportunity?

Mary-Jo Kranacher, MBA, CPA, CFE

As the global economy tanks and prospects fade for a turnaround in the near term, businesses are desperately seeking ways to mitigate their expenses and losses—to help their bottom line, and for some, to simply survive. They're slashing costs—and jobs—to cope with sagging sales. General Motors recently announced that it would cut another 2,000 jobs as its president arrived, hat in hand, to ask Congress for billions of dollars as a temporary fix for the company's growing financial problems. AT&T, DuPont, and JPMorgan Chase were among the many companies announcing layoffs. In the past few months, 1.2 million Americans lost their jobs—533,000 in November alone. These cuts will be a bitter pill for the individuals and families directly affected, and the results will ripple through the rest of the economy. According to the Mortgage Bankers Association, one in 10 American homeowners with a mortgage was either a month or more behind on payments or in foreclosure as of the end of September 2008. Given the dire impact of layoffs, they are a last resort for struggling employers. So where else can businesses look for opportunities to shore up their bottom line?

Fraud Losses

The Association of Certified Fraud Examiners' (ACFE) 2008 Report to the Nation estimates that approximately 7% of a business' annual revenue is lost to fraud. When this percentage is applied to the 2008 projected U.S. Gross Domestic Product, it translates into fraud losses of about $994 billion. According to the report, small businesses are especially vulnerable to occupational fraud; organizations with fewer than 100 employees reported a median loss of $200,000. Furthermore, a recent article in The Wall Street Journal indicated that the current economic recession is causing an increase in employee theft—from fictitious sales transactions and illegal kickbacks to the theft of company equipment and inventory.


The best way to minimize fraud losses is to prevent them from occurring in the first place. Companies should establish a governance structure that will enhance accountability, effectively manage risk, and foster an ethical culture. A fraud risk assessment should be conducted to identify key areas where the organization is most vulnerable, because a business can't control risks of which it's not aware. In addition, this assessment should determine the types of fraud that may occur and how they might be concealed.

Another way to prevent fraud is to develop and maintain a strong antifraud program and controls, including surprise audits, anonymous hotlines, and fraud training for managers. The “perception of detection” goes a long way in helping to deter fraud. In fact, the ACFE report found that organizations that implemented antifraud controls reported a median loss of $70,000, one-third the amount of those that did not.

Early Detection

Occupational fraud schemes often continue for years before they are detected. Most frauds start small and increase as perpetrators gain confidence in their ability to conceal their crimes. The best way to minimize losses from fraud is to catch them early in the game. Look for red flags based on correlation, anomaly detection, and pattern discovery. Using available technology, data can be “mined” from applications, databases, management systems, and network infrastructures, and then exception reports can be generated to assist in detecting the warning signs that fraud may be occurring.


Employees who commit fraud against their organization may face harsh consequences. The crucial word here is “may,” because many employers refuse to press charges for fear of negative publicity. Yet criminologists have found that for enforcement to be effective, justice must be definite. In fact, the severity of the punishment is actually less important than its certainty.

Many employers strengthen internal controls and implement other antifraud programs after a fraud has occurred. In the words of a Texas colleague, that's like closing the barn door after the horses have gotten out. Remediation of fraud losses can be an expensive proposition; it can include litigation, tracing stolen assets, and hiring an army of expert witnesses to testify on the company's behalf in a court of law. But the sad truth is that, in most cases, there is little chance that the stolen assets will be recovered.

Medical doctors know that prevention is the best medicine. The same can be said for occupational fraud. Preventing fraud will mean a healthier bottom line and reduce the need for more drastic measures to keep a business viable.

As always, I welcome your comments.

Mary-Jo Kranacher, MBA, CPA, CFE. Editor-in-Chief.

Search for archived articles, authors, and topics below:


Login or create a new account