The Fraud Examiner


March 2014

By Misty Norris-Carter, CFE, CIA

Fraud prevention measures are valuable to all organizations. Yet, how much fraud prevention is worth — or its measurable value to an organization — can vary. Detecting fraud in a timely manner translates to lower fraud losses for an organization, which results in savings to the company. This in itself can be a motivating factor that drives management in many companies to implement fraud preventive measures. Others, however, might require a bit more coaxing. Consequently, in order to effectively “sell” fraud prevention to management, it is important to be able to articulate why such initiatives are essential.

Impact to the Bottom Line

According to the ACFE’s 2012 Report to the Nations, it is estimated that an organization typically loses 5 percent of its revenues to fraud each year. If you were to apply this estimate to your organization’s annual revenues, what would be the potential fraud loss to the bottom line? The result might be surprising, and appealing to management’s focus on the impact of fraud to the company’s bottom line can be extremely effective.

One way to get management’s attention is to research the potential cost of fraud and present it in a manner that speaks to their business sense. For example, imagine you are a Certified Fraud Examiner (CFE) for a company in the retail industry. You are aware that anti-fraud controls related to a particular product are weak due to shrinkage, and you have ideas on how to improve these controls. You already know that fraud affects net sales dollar for dollar, so you perform several analyses to determine the company’s potential fraud loss related to this particular product. Your findings show that the company nets 25 percent on sales of the product. So for each individual item lost to fraud, the company must sell four additional products to cover the loss of the one item. Additionally, you are able to determine that despite generating monthly net sales of $100,000, the company loses approximately $20,000 per month to shrinkage because of a lack of anti-fraud controls.

Presenting such information to management in this manner helps them to easily identify bottom-line effects that fraud can have. This can be a very powerful way to stress that fraud loss directly equates to decreased profits.

Benchmark Studies

Many companies rely on studies and benchmarks to determine best practices. This same logic can apply to fraud prevention. Various institutions have conducted independent studies to serve as a guide in assessing the value of fraud prevention. For example, Ponemon Institute and Tripwire, Inc., conducted a study using a sample of 46 multinational organizations. The purpose of this study was to determine both the economic impact of compliance and the cost of non-compliance with laws, regulations, and policies. Findings in their research report, The True Cost of Compliance, revealed that the cost of non-compliance can be more expensive than investing in compliance activities.

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