The #1 threat to a growing business is internal fraud. This risk occurs when the business grows to the point where the owner hires the first bookkeeper. At this stage, the business is not large enough for a full-blown accounting department, but needs a person to pay bills and invoice customers. Hiring a bookkeeper can be a great decision for a business owner but it can also be a costly one if precautions are not taken.
According to the most recent study from the Association of Certified Fraud Examiners, average cost per fraud incident is $140,000 and more than 20% of fraud cases cost at least $1 million. Companies suffering from fraud report a typical annual loss of 5% of its revenue. More alarming is that nearly half of organizations, who suffer fraud, never recover any of the losses. According to some experts, theft by employees can account for as high as 50% of all failed businesses.
Fraud occurs when three conditions are present:
1. Opportunity can be controlled entirely by the company through the division of duties. However, it can be expensive to split duties or hire additional people to control 100% of the risk. Owners must make difficult decisions using wise judgment about balancing the cost with the risk.
2. Justification can be controlled to a degree through managing a company’s culture, employee respect, management style, and the attitude of the owner. Few employees will believe it is right to steal from a company if they are being treated well.
3. Motivation is the one condition for fraud that can’t be controlled by the company. An employee who commits fraud will rationalize their actions because of a personal need, such as an unexpected expense or an addiction. When Motivation is high, minimizing Justification through company culture may not be good enough to deter the fraud.
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