Keeping the company safe: preventing and detecting fraud: corporate fraud globally continues to cost businesses dearly. Recognizing some red flags that may indicate fraudulent activity is underway, CFOs can reduce the risk that their firm is targeted.

• Author: Kroll, Karen
• Position: Fraud

A recently released report notes that fraudulent actions by employees, customers and vendors cost organizations around the globe about $3.5 trillion annually. Asset misappropriation schemes accounted for almost all--87 percent--of the nearly 1,400 cases examined, while the median loss was $140,000 and the median length of time until detection was 18 months, according to the 2012 Report to the Nations on Occupational Fraud and Abuse, developed by the Association of Certified Fraud Examiners (ACFE).

These numbers are enough to give any chief financial officer pause. Moreover, they cover just those schemes that were reported and investigated. "It's what you don't know that keeps you worried," says Robert Fetterman, vice president of finance at Oneida Nation Enterprises, Turning Stone Resort and Casino in Oneida, N.Y.

Though completely eliminating fraud may be unrealistic, financial executives can be involved in reducing the risk that their firms will be victims. Fostering a culture that places a priority on acting with integrity, exercising professional skepticism and implementing policies and technology to protect corporate assets can reduce the likelihood of fraud.

The consequences to companies of becoming a victim of fraud continue to climb. Along with financial losses, many firms experience a strong hit to the perception of their organizations by customers and investors. "The impact can be severe if customers and shareholders lose confidence in the company," says Hal Garyn, vice president of North American services for The Institute of Internal Auditors (IIA).

In addition, fraud inquiries increasingly conic from multiple regulatory agencies within the U.S., says Yogesh Bahl, a partner in the forensic and dispute services practice at Deloitte Financial Advisory Services LLP. "You can have one event subject to different regulations." Companies are then forced to manage and coordinate inquiries from these different agencies, which can boost costs and the potential damage to their reputations, he notes.

Elements of Fraud

Any fraudulent act requires three elements, Garyn says. First, an individual must have a perceived need. While this includes people in truly desperate situations, it also covers those who simply feel that they could use--or deserve--more money than they are receiving.

The second is the opportunity to commit a fraudulent act. The individual has to exploit or attempt to exploit a control weakness, Garyn says.

While it's rarely practical or possible to prevent all fraudulent behavior, implementing solid internal controls through both technology and company policies can pay off. Indeed, a lack of internal controls played a role in more than one-third of the...