Charles Ponzi and Bernie Madoff are among the most infamous fraudsters in United States history. Charles Ponzi’s 1920’s era scheme cost his investors more than $200 million in current dollars and gave name to the “Ponzi scheme” that Bernie Madoff used to commit his $17.5 to $20 billion (yes with a “B”) fraud that was exposed in 2008 (still the world’s largest financial fraud).
For most businesses these two names represent good news and bad news. The good news – most companies are very unlikely to face a fraud of these magnitudes. The bad news – the potential for much smaller frauds is very real for most companies and even small frauds can have a significant impact on your business. Based on the most recent study by the Association of Certified Fraud Examiners:
So what are the factors that contribute to fraud risk and what can be done to mitigate those risks? A common framework for understand fraud risk is known as the fraud triangle – three elements that are present in most fraud scenarios:
Eliminating any one of the three elements necessary for fraud will significantly reduce the potential for fraud. The easiest element for a company to control is opportunity. A well-designed and functioning internal control system is the number one defense against fraud.
A key element in a well-designed internal control system is appropriate separation or segregation of duties. If at all possible (and more difficult in small organizations), one individual should not have access to assets and responsibility for control activities, and/or authorization responsibilities and the ability to record financial transactions. When one individual has custody of the entire accounting process in a particular area, they have OPPORTUNITY! Changing accounting processes to create appropriate segregation of duties can significantly reduce the opportunity and decrease the risk of a fraud.
To learn more about fraud and fraud prevention join us on Thursday, March 20, 2014 for GBQuarterly: “Fraud: The What, Why and How.” We will be discussing the how NOT to let it happen to your company or organization.