Protecting Your Business from Fraud

Participants in the 2006 Report to the Nation on Occupational Fraud and Abuse, compiled by the Association of Certified Fraud Examiners (ACFE), estimated that U.S. organizations lose 5% of their annual revenue by becoming victims of fraud. This figure estimates approximately $652 billion dollars in fraud losses in 2006 alone.

Small businesses carry the largest burden, with the median loss of a business with 100 or fewer employees weighing in at $190,000 per scheme. This is the same group cited for not working to proactively detect fraud in the workplace, allowing frauds to continue until being uncovered by accidental means.

Set realistic goals

These alarming figures indicate that more needs to be done to proactively defend against fraud. How can you better protect yourself and your business? By understanding the risks, planning for the worst and doing your homework, you can put in place the measures that are needed to help you alleviate some of the burden you currently may be carrying.

However, it is important to be realistic. Fraudulent behaviors will and should always be a concern, as those who plan to act fraudulently will find a way around the systems you put into place. Do not underestimate the importance of deterring thievery and putting a stop to ongoing problematic practices. These actions can save you money in the long run, which is exactly where Allan Bachman, CFE, MBA, education manager for the ACFE, said small business owners need to also be focusing their attention on some of the red flag indicators of fraud.

“Small businesses focus, and rightly so, on their survival, and their survival is linked to capturing a piece of the marketplace, getting customers, building a customer base and building sales. One of the last things you are looking at as the money is rolling in is how quickly it is getting to the bank.” Bachman said. “What can result from that is an employee may recognize…the opportunity in a small organization and say, ‘The business owner isn’t paying attention to this and if they don’t care, I don’t care.’”

This then may create a climate where a variety of schemes and frauds can develop, effectively taking advantage of loose controls, he continued.

“I have always said that I can design the most perfect control in the world but as soon as you add an individual to it you are going to weaken that control because individuals are the unknown quantity,” Bachman told O&P Business News. “They can be tempted by any number of things.”

Create a code of ethics

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Rob Benedetti, controller for De La Torre O&P and consultant for Promise Consulting Inc., suggests nurturing a culture of integrity with ethics. If you want your business to thrive fraud-free, a good first step is to lay the groundwork to allow that environment to exist by creating a code of ethics for your company to adhere to.

To determine what kinds of information you need to include, first brainstorm about the ethics problems your employees could face while conducting business and what situations this code will aim to avoid. From there you can create a list of ethical values for everyone to uphold.

Let your staff know that the values you implement for your business should govern their actions. And spell out within the code if you plan to discipline staff if ethical infractions are discovered. Benedetti said these values allow you the opportunity to explain why certain actions are taken–to abide by the adopted code.

“[In our company], we can point people back and say this situation demands this response because our values dictate that,” he said.

Do not act hastily when creating the set of values that will oversee your business, as they should become a tool that your business runs by and references often.

Involve as many people as possible in the construction, keeping in mind that something the staff plays an active role in creating is something they will more likely buy into.

Walk the talk

Once your business has created and introduced a code of ethics, it is important to keep it relevant and review it periodically with the staff to keep it at the forefront of all business communications.

Perhaps even more important is that everyone – including management – is on board with the new guidelines.

“Management needs to walk the talk,” Benedetti said. “If the managers of the company or the lead clinician or even the owner isn’t willing to be above board in their dealings, if they take shortcuts on billing or charge entry, or if they deal with a vendor in a way that is not ethical…and the frontline people see that, then they are going to be more prone to taking shortcuts themselves or treating the customer or vendor differently than what they should.”

Management needs to be able to lead the way and set an example for the rest of the company.

Enact an open-door policy

When it comes to business fraud, more often than not, these schemes are uncovered by whistleblowers. In the ACFE 2006 Report, researchers found that 44% of fraud schemes totaling losses of $1 million or more were uncovered by other employees anonymously reporting their suspicions.

The report also stated that, “Occupational frauds are more likely to be detected by a tip than by other means such as internal audits, external audits or internal controls.”

The bad news is that audits in small business are not as commonplace as they are for larger firms. Most often they are not cost-effective enough to conduct on a regular basis. However, many small businesses employ a third-party hotline for employees to leave their anonymous tips on ethical wrongdoing in the workplace.

Bachman said the key component to an ethical climate is having somewhere to go to when something is amiss.

“Most of these frauds…are uncovered by people who have suspicions that something’s wrong and whistleblowers contribute highly to the discovery of fraud,” Bachman said.

Bachman supports subscribing to an outside ethics line and including that information in your ethics policy.

“For every 10 calls you might only get two that are worth pursuing,” Bachman said, stressing that uncovering just two fraudsters could make all the difference to a business. “Small businesses can have this type of situation. They can have an open door policy that allows employees to come and say, ‘I think I saw something’ or ‘I think I found something,’ and remain anonymous and allow the process to begin where their accusations or suspicions and allegations can be pursued.”

Responding to Incidents of Fraud

For an O&P business owner, finding out that your business has been the victim of fraud is devastating, but the next steps in handling that truth could make or break the company. Business owners need to be careful with how they proceed in investigating the supposed wrongdoing. In this litigious age and with differing state laws, it is best to always be prepared for the worst case scenario.

Document problems

“We have learned that it is critical to document problems with an employee,” Rob Benedetti, controller for De La Torre O&P and consultant for Promise Consulting, said.

Documenting poor performance or specific concerns and informing that employee of these issues gives them the chance to change their habits. It also gives you, the business owner or manager, the peace of mind knowing that you are treating your employees with the same respect you demand they give customers.

Documenting suspected fraudulent behaviors for your own records also might be helpful in the event that something is uncovered. It is important, however, not to jump to conclusions based on suspicions. Keep a close eye on goings-on that seem under par.

Be wary of excuses

Allan Bachman, CFE, MBA, education manager for the Association of Certified Fraud Examiners, warns to be on the outlook for red flags alerting you to fraud. If the same employee forgets to go to the bank on a regular basis, for example, you might want to keep a closer eye on the finances to see what is going on.

“Maybe it is a simple mistake but it is always worth double-checking,” he said. “Trust but verify.”

You may want to look at past statements to see when deposits were made versus when payments were received for example. As the business owner, you need to be visible and interested in the process.

Take action

Respond to incidents of fraud swiftly so that the employees are aware that the company is serious about handling those issues, Benedetti explained.

Gather facts quickly but quietly and if something is found, it is wise to call in an outsider to help with the investigation.

“You don’t necessarily make a lot of noise about it if you suspect something,” Bachman said. “I would call somebody from the outside that can do an investigation, look into what has been happening and interview people.”

Depending on the size of the fraud, you might decide to prosecute.

“If it is your policy to prosecute, then it can be a great deterrent,” Bachman said.


Evaluate your system

Over time it is easy for owners and managers to find a certain level of comfort in the way the business runs. However, Joyce Perrone, consulting partner with Promise Consulting Inc. suggests re-evaluating these processes not only to make sure they are running smoothly and without foul play, but also to maintain efficiency and exert the level of control a manager should never forfeit.

“Start mapping out what your processes are,” Perrone told O&P Business News. “When an order comes in from a hospital, what is the process to get that order filled, taken back to the hospital and billed? Map it out the way it is and you look at it and say, ‘How can I make it better?’”

Make sure that your employees are working at their highest level. An employee not working at the level or capacity for which they are hired is as much a loss of internal control and evident waste in the system as is any fraud scheme.

“Am I having my highly compensated CPO…filing? Are there things they are doing that are not at the level for which they are paid?” Perrone said.

Purposeful assignment of duties ensures that you are not costing the business dollars that could be better spent and also keeps your grasp firm on the controls of the office.

Stay in financial control

A loss of financial control is the biggest mistake that business owners can make. Everything from setting a target budget to looking over bank statements should be within the reach of the business owner.

“The person who holds the purse strings is in control,” Tomas Norton of The Norton Group told O&P Business News.

Perrone and Benedetti advise setting a budget, knowing your targets and checking them every month. When you start to see unexpected increases in line items, then you need to dig a little deeper and look through the details to determine the cause. Knowing your budget can help you to catch these things right away.

As the owner of the business, you should be familiar with your banking institution and make them aware that you reserve the final say in all financial matters concerning the business in the event that you are not the person they most frequently see. Most small business owners delegate someone else to handle the finances, especially in orthotics and prosthetics where the owner is also most likely seeing patients and not handling the money.

“Don’t let the bank become so familiar with the individual making the deposits that they think those people are running the account,” Norton said. “That sort of delegates authority to that person and occasionally the banks will do something on that person’s say so that is injurious to the [business owner].”

He also advises separating the bookkeeping and reconciliation of the bank account duties. Some research suggests having bank statements mailed to the owner’s home address to ensure receipt without tampering.

The Most Prevalent Fraud Schemes in Health Care

Assess new hires thoroughly

“Make sure you are hiring good people that have good track records, and that only comes by digging a little deeper and trying to come up with who this person really is,” Benedetti told O&P Business News.

O&P is a tight and competitive market, Benedetti continued, but you want to collect all of the information you can about a potential new hire.

Business owners can use traditional methods of screening new hires such as background checks and calling references as all of our resources suggest, however there are some roadblocks to take into account.

For small businesses, background checks can become expensive and are not necessarily indicative of some of the things that concern an employer, Bachman said, offering this example. A candidate may not have a criminal record but that does not indicate their financial standing, which could lead to fraudulent behavior.

Checking references can often be time consuming and unfruitful, which is probably why this step is often skipped. References are often prompted by the candidate and ready and willing to say a few kind words.

If businesses are looking for more cost-effective ways to evaluate people, Bachman suggests talking to them and taking some time to get to know them. Also, ask them some ethical questions to see what they would do in certain situations.

There are organizations who conduct tests like this as well as resources on the Internet for more information and implementation in the business setting.

Consider your pay scale

“The organization is held up from the bottom up,” Perrone said, emphasizing the importance of paying the right wages to all of your employees, especially front office people.

Skimping on wages is like asking your employees to commit fraudulent acts against your company. Those with access to the financial figures of the company are certainly no exception. There are resources available that can help business owners determine the correct wage and benefits for employees. Being fair will surely increase the chances that those who work for you will do so with honesty.

The Cost of Health Care Fraud

The following figures were included in the 2004 and 2006 Reports to the Nation on Occupational Fraud and Abuse. They represent the number of cases studied in the health care industry and break down the fraud cases by scheme.

In 2004, the 37 cases reported made up 7.3% of total cases studied and the median loss in the health care industry was $105,000.

In 2006, the 89 cases reported made up 8.6% of total cases studied and the median loss in the health care industry was $160,000.

For more information:

  • 2004 Report to the Nation on Occupational Fraud and Abuse. Association of Certified Fraud Examiners Inc. To read the entire report, visit
  • 2006 Report to the Nation on Occupational Fraud and Abuse. Association of Certified Fraud Examiners Inc. To read the entire report, visit

Conduct regular check-ups

To ensure that your business is running smoothly, conduct regular checks on your own or with an auditor. For smaller businesses, it might be easier to do them yourself at regular and irregular intervals. Research suggests that the element of surprise will dissuade potential thieves from wrongdoing.

Benedetti suggests calling on the business’ tax accountant for help since the options for cost-effective checks on the part of small businesses are limited. He also suggests requesting the help of colleagues for advice since they know the industry and the financial risks associated.

Keep in mind as your business grows, that risk increases alongside the business capital. Norton suggests re-examining your processes as necessary.

“As [the company gets] bigger, they should review their operations,” Norton said. “If you have grown to four or six or eight or 10 people working with you, then you should look at how they are doing the transactions.”— by Jennifer Hoydicz

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