What would you do if your finance director embezzled $280,000 from your company? Could you afford the loss?
Would your first reaction be, “I had an outside audit conducted — how could this happen?” Unfortunately, auditors are usually not tasked with detailed forensic analysis, and fraudsters are often adept at manipulating audit information. If you think, “I’m too small for fraud,” not so: 28 percent of frauds occur at small businesses and the median losses are double what large businesses suffer.
You would probably want to know how the embezzlement scheme was conducted and how it went undetected. And to find those answers, you would have to endure an expensive process of proving the embezzler’s culpability, terminating the embezzler’s employment, engaging a forensic accountant to total your loss, seek legal counsel to explore the possibility of recovering the funds, and even consider prosecuting your former finance director. You would also need to fill the finance director’s role with someone capable and trustworthy at a time when your trust level is diminished.
It would be wise to evaluate the internal controls you thought were impenetrable and rethink processes, procedures and oversight throughout the company. And you would have to manage and control internal and external messaging about the theft to protect your firm’s image to customers and employees.
If embezzlement by C-suite personnel were not a problem, you could dismiss this list of unpleasant steps as fantasy and pat yourself on the back for instituting an anti-fraud board of directors audit committee.
But C-suite fraud is not fantasy at all. According to the Association of Certified Fraud Examiners (ACFE) 2018 Report to the Nations on Occupational Fraud and Abuse, 19 percent of frauds are committed by owners/executives, and the median loss due to fraud committed by these individuals is $850,000. The report states that the correlation between authority and loss most likely occurs because high-level fraudsters tend to have greater access to their organization’s assets than lower-level employees, as well as a better ability to evade or override anti-fraud controls.
If you want to reduce the likelihood of finding out about a C-suite fraud long after you’ve lost valuable assets, there is a relatively simple tool to police the threat: C-suite background investigations. Rehmann Corporate Investigative Services provides these services to firms and businesses throughout the country.
C-suite backgrounds have multiple deterrent effects and they work synergistically to strengthen your fraud prevention strategy.
Voluntary recusal: Many C-suite level employees are brought in on a recommendation, enjoy a reputational advantage, and are not subject to exacting reviews. If there is any red flag in their background, it is often unknown to the HR department. Someone with a red flag might avoid moving forward with your firm simply because they do not want the information uncovered by your background investigation, which is a benefit to your firm.
Prevention: By instituting in-depth C-suite backgrounds at your firm, you might protect yourself from hiring someone with a history of bankruptcy in previously run firms or ties to firms with questionable practices, or from hiring someone with financial stresses to a position with broad fiscal authority. A C- suite background is a deep dive into an individual’s history that can uncover well-hidden information.
Deterrence: The mere fact you are instituting a C-suite background program will send a signal to anyone contemplating or actively participating in fraud. Your background program can start immediately and include applicants and those already employed. Your background investigations should be repeated on each employee at this level on a regular basis.
Empowerment: If employees sense an “anything goes” mentality at a firm, they will not feel it is their responsibility to report wrongdoing. When leaders set a zero-tolerance tone with backgrounds for high-level employees, those who see the small manipulations of a big fraud are more empowered to report.
C-suite backgrounds are a wise investment. When the median C-suite fraud is $850,000, a proactive and preventive background makes fiscal sense. According to the ACFE report, the median loss suffered by small organizations (those with fewer than 100 employees) was $200,000 while the median loss for large organizations (those with more than 100 employees) was $104,000.
