Studies show that companies lose 7% of the their revenue to fraud and that the median amount of the lost is $175,000. As recent incidents prove, media companies are not immune. The MFM may be able to help you from falling victim. It’s sponsoring a distance learning seminar next week on ways for keeping your dollars from disappearing.
Katy bar the door. Inaction to protect from fraud can be a costly mistake.
I just read a summary of a study by the Association of Certified Fraud Examiners (ACEF), which estimates that U.S. organizations lose seven percent of their annual revenues to fraud.
The 2008 Report to the Nation on Occupational Fraud & Abuse shows that the median loss from a occupational fraud scheme is $175,000 with more than 25 percent of the frauds involving losses in excess of $1 million.
Other surveys indicate that more than 80 percent of U.S. companies are anticipating an increase in fraud activities. This is over and above the seven percent estimated by the ACEF report.
Think it can’t happen in our industry? In 2003 an employee of Chicago’s noncommercial WTTW was accused of taking at least $260,000 by manipulating the station’s accounting and computer systems. And just last year, the former treasury manager of NBC Universal pleaded guilty to stealing more than $800,000 from the company.
These are just two cases that made the national press in the past few years; my guess is that many more were settled quietly.
Despite the increased focus on anti-fraud controls in the wake of Sarbanes-Oxley, ACEF’s data show that occupational frauds are much more likely to be detected by a tip than by audits, controls or any other means. Nearly half of the cases studied for ACFE’s report were detected by tips from employees, customers, vendors, and other sources. Tips were also the most common means of detection in research the association conducted in 2002, 2004 and 2006.
That’s not to say that an ounce of prevention is not worth a pound of cure. ACEF’s study found that implementing of anti-fraud controls can have a measurable impact on an organization’s exposure to fraud. The association examined 15 specific anti-fraud controls and measured the median loss in fraud cases depending on whether organizations did or did not have a given control at the time of the fraud. The report showed that, in every comparison, there were significantly lower losses when the controls had been implemented.
For example, organizations that conducted surprise audits suffered a median loss of $70,000, while those that did not had a median loss of $207,000. The association said it also found similar reductions in fraud losses for organizations that had anonymous fraud hotlines, offered employee support programs, provided fraud training for managers and had internal audit or fraud examination departments.
It is with this in mind the MFM decided to offer a distance learning seminar called “Strategies for Reducing Exposure to Fraud” on Tuesday, Sept. 22, from 3:30 p.m. to 4:45 p.m. ET. This Seminar will be presented by Christopher Arehart, a manager in the Specialty Risk Center for the Chubb Group of Insurance Companies.
A report from Ernst & Young, “Detecting Financial Statement Fraud: What Every Manager Needs To Know,” will be one of Arehart’s sources.
E & Y uses the “fraud triangle,” developed by Donald R. Cressey, a criminologist who studied embezzlers to explain why fraud happens. Cressey said three factors are typically present when a fraud occurs: rationalization, opportunity and pressure. While rationalization is more of a psychological element, opportunity and pressure are factors that companies can address, according to the report and industry experts.
Opportunity can arise from a lack of organizational controls and security, the experts note. When companies are deficient in these areas they create ample opportunity for fraud to occur.
Meanwhile, pressure can be created by the demands to meet earnings targets, which are often tied to compensation under management incentive plans. This type of pressure can affect the “tone at the top,” or the implicit messages that a manager sends to employees by virtue of emphasis, proportion and frequency. For example, a tone that places a disproportionate emphasis on financial results or stock price may send the message that cutting corners is acceptable, the experts warn.
Arehart’s presentation will also review the types of corporate fraud that occur in the workplace including asset misappropriation, corruption and financial statement fraud. Asset misappropriation — essentially stealing — includes larceny, which occurs after the asset is recorded on the books, and skimming, which occurs before the asset is recorded.
According to the 2008 ACFE report, the most common types of fraud schemes were corruption, which occurred in 27 percent of the cases, and fraudulent billing, which occurred in 24 percent of the cases. While occurring least frequently, ACEF found financial statement fraud to be the most costly category, with a median loss of $2 million in the cases reviewed by the organization.
In addition to reviewing the factors that he sees leading to an increase in fraudulent activity by employees and vendors, Arehart’s presentation will take a close look at the most common areas where companies experience these types of fraud and steps they can take to reduce the risk of their occurrence. This includes accounts payable systems, which are vulnerable to fraud by vendors and employees, through personal purchases, falsification of expense reports, bribery and kickbacks and check frauds.
Distance learning seminar participants will come away with a series of measures they can take to reduce the risk of fraud within their organizations, including enhancements they can make to their employee and accounting policies and strategies for protecting payroll and purchasing systems from fraudulent activities.
In a time when shrinking revenues make every dollar precious, we cannot afford to dismiss the potential impact of fraud on our business. “Fraud is an ongoing issue for organizations, and when the economy goes south the exposure really goes north,” Arehart says.
Thanks to Arehart and our friends at Chubb, MFM’s preferred provider for media business insurance, the seminar will share examples of fraud that can occur within our industry and others and use them to help you prevent exposure to fraud from going north in your organization.
At the same time, it’s important that we don’t allow the trust that we place in our co-workers, vendors and business associates to go south in the process. As the ACEF data illustrates, employees and other close to our organizations can be the best sources for tips concerning where fraud occurs and for suggestions on how to prevent it from happening.
It is this aspect of our discussions concerning fraud that links this seminar with the other educational programs MFM offers. We typically focus on strategies for moving revenues and profits in a northerly direction or discuss financial issues specific to the media industry.
In the coming months these programs will include a distance learning Seminar on Oct. 22, “State Sales and Use Tax: What You Don’t Know Can Hurt You,” and a regional Seminar at the McGraw-Hill Building in New York on Nov. 17 on the Media Outlook for 2010 which is being organized in association with Federation of Credit and Financial Professionals. More information concerning these and other programs and services offered by our association may be found on MFM’s Web site.
We are also in the early stages of planning the agenda for our 2010 Annual Conference (our 50th), which will be held in Nashville May 23-25. I welcome your suggestions on the topics and speakers that will be the most beneficial to you and your company.
After all, your tips are also the best way to ensure that the MFM keeps moving north.
Mary Collins is the president and CEO of the Media Financial Management Association, a professional society addressing the diverse needs of the industry’s financial and business professionals. Her column appears here every other Friday.