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You are reading: What Does Fraud Cost You?

May 20, 2024


WHAT DOES FRAUD COST YOU?

DANIEL BERLIND

CEO


IN THIS ARTICLE

 * Average Cost of Fraud for Businesses
 * Types of Costs That Fraud Causes for Businesses
 * How Much Do Companies Spend on Fraud Prevention?
 * How Fraud Affects Small, Medium, and Large Businesses
 * Tips to Prevent Fraud
 * Real Estate and Document Fraud
 * Don’t Let Fraud Get You Down

From accounting, invoice, and payroll fraud to inventory theft, external
phishing attacks, wire transfers, and money laundering, business fraud can occur
once and cost an organization millions – or take place gradually over several
years with the same result.

In fact, according to the Association of Certified Fraud Examiners (ACFE) 2022
Report to the Nations on Occupational Fraud and Abuse, “a typical fraud case
lasts 12 months before detection and causes a median loss of $117,000.” Nearly
half of all reported frauds in the study occurred in four departments:
Operations, Accounting, Executive/Upper Management, and Sales.

As a business owner, losing any money can harm your growth and survival, so
preventing fraud within your company is essential. Let’s take a look at the
average cost of fraud, examining how it financially impacts concerned business
owners and how to avoid it.


AVERAGE COST OF FRAUD FOR BUSINESSES

Here are some of the AFCE’s key figures and findings from the 2022 report:

 * Organizations lose 5% of revenue to fraud each year
 * A typical fraud case causes a loss of $8,300 per month and lasts 12 months
   before detection
 * 42% of frauds were detected by tips, and more than half of all tips came from
   employees

In addition, the report revealed that small businesses rank highest in fraud
frequency at 42% compared to large companies, government organizations, and
non-profits. The most significant contributing factor? A lack of internal
controls.


TYPES OF COSTS THAT FRAUD CAUSES FOR BUSINESSES

Fraud can start internally or externally from employees, customers, or
suppliers. It most frequently occurs with operations, accounting, sales, and
upper management employees. The industries with the most reports of corporate
fraud include real estate, wholesale trade, transportation and warehousing,
construction, and utilities.

Interestingly, owners/executives committed only 23% of frauds, but they caused
the largest losses, according to the AFCE’s report. And 85% of fraudsters
displayed behavioral red flags of fraud. As part of the study results, experts
discovered that nearly half of fraud cases occurred due to a lack of internal
controls or if someone overrode existing controls.

As you can imagine, the impact of fraud on a business, no matter the size, can
be detrimental, leading to massive financial losses, possible legal
ramifications, and a drop in employee morale and trust.

Even worse, the consequences aren’t solely financial. For instance, your
business can also suffer significant reputational damage. Ultimately, all these
factors can severely jeopardize the survival of your business.


HOW MUCH DO COMPANIES SPEND ON FRAUD PREVENTION?

On average, mid-sized companies spend 11% of their annual revenue on fraud
prevention, while small businesses spend about 6%. Research shows that larger
businesses that earn $50 million annually spend significant amounts on fraud
prevention, with the global average estimated at 10%. Many spend at least $5
million annually to fight against fraud.


HOW FRAUD AFFECTS SMALL, MEDIUM, AND LARGE BUSINESSES

Unfortunately, no business is impervious to fraud. However, small businesses are
particularly at higher risk. According to recent studies, small businesses
experience fraud at a 42% higher frequency than large corporations. A
significant loss and an extended period during which the fraud occurred can harm
a small business. Think about it: a small company that repeatedly loses
thousands of dollars for a year or more in many cases is not prepared to rebound
and will either be forced to downsize or shut down permanently.


TIPS TO PREVENT FRAUD

There are several steps business owners can take to prevent fraud. Read below
for some tips to get you started:


INTERNAL TIPS

Know your employees and supervise them effectively. Always check references and
conduct background checks on prospective job candidates, especially those with
access to financial records or cash. Be alert to potential risk factors, like
financial troubles, drug abuse issues, or living beyond their means. Also, no
one likes to be a micromanager, but overseeing your employees is crucial. Check
in often to ensure they report hours and perform tasks appropriately.

Separate duties. If you only have one person in charge of handling your
organization’s finances, it’s making it easier for fraud to go unnoticed. If
possible, enlist the help of at least two employees to take care of your
company’s accounting and bookkeeping tasks.
Train and create policies. Educate team members with full access to business
finances on the risks of email compromise. Create a policy for any wire transfer
requests that anyone sends by email.

Keep computers updated. Ensure laptops, desktops, tablets, and other mobile
devices are updated with the latest software and antivirus programs – they can
help detect malicious behavior, not only infected files.
Utilize multi-factor authentication. Multi-factor authentication systems send a
code to your employees’ cell phones to ensure their accounts are safe. If a
username and passphrase are compromised, a hacker can be stopped by the secret
code sent to a mobile device.

Restrict access. Limit access to your accounting software to only the employees
who need it to perform their jobs properly. Everyone in your company should have
their own ID and password. And most importantly, passwords should be changed
regularly.


EXTERNAL TIPS

Know your business partners. Before developing a business relationship with
another company or individual vendor, make sure you know the basics. Be sure to
have their physical address, alternate contact methods, and individuals and
references. Additional resources about background information can be found via
the Better Business Bureau (BBB).

Just reach out. Require your staff to contact vendors and customers to verify
any email requests for wire payments above a specific dollar amount. This
strategy can prevent your company from inadvertently sending funds to fraudsters
who’ve compromised email accounts at other industry partners you may conduct
business with.


REAL ESTATE AND DOCUMENT FRAUD

As you can see, there are numerous kinds of fraud, but one of the most common is
rental application fraud. One in eight (12%) rental applications contains some
type of fraud. Unfortunately, according to recent statistics, eviction costs
$7,685 after unpaid rent, legal fees, and other charges are considered.

Perhaps you’ve experienced it as a landlord or property manager. Have you ever
received a rental application from a prospective renter and everything looks
good to go at first glance – their credit score, employment history, and
references all pass the test?

However, after the dust settles, you soon realize that the potential tenant has
forged income documents, employment verification, or rental history to make it
appear they are more financially stable than they really are. This type of fraud
can lead to leasing properties to unqualified tenants who may fail to make
timely rent payments or even cause property damage.


DON’T LET FRAUD GET YOU DOWN

It’s important to understand that those willing to commit fraud do not
discriminate. Realize that it can happen in large or small businesses –
including the real estate space – and across numerous industries.

Fraud can result in significant financial loss, legal costs, and muddied
reputations that can lead to the downfall of a company. Just use our calculator
to figure out how much it’s costing you. By implementing the proper plans, you
can dramatically reduce fraudulent activities from taking place or reduce losses
if something has already occurred. The bottom line: the price of working
proactively to prevent fraud is far less costly to a business than the cost of
the fraud that gets committed.

Ready to protect your properties?

Chat with our sales team to learn about our comprehensive fraud solution

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