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CORPORATE FRAUD HANDBOOK

accounting department—that employee writes checks, reconciles the accounts, and posts the books. An entry-level accounting student could spot the internal control deficiencies in that scenario, but apparently many small business owners cannot or do not.

Which brings up the second reason we believe losses are so high in small organiza- tions: There is a greater degree of trust inherent in a situation where everyone knows each other by name and face. Who of us would like to think our co-workers would or do commit these offenses? As a result, our defenses are naturally relaxed. There again is the dichotomy of fraud: It cannot occur without trust, but neither can commerce. Trust is an essential ingredient at all levels of business—we can and do make handshake deals every day. Transactions in capitalism simply cannot occur without trust. The key is seek- ing the right balance between too much and too little. (See Exhibits 1.21 and 1.22.)

The Impact of Antifraud Measures on Median Loss

CFEs who participated in our national fraud surveys were asked to identify which, if any, of five common antifraud measures were utilized by the victim organizations before the reported frauds occurred: The antifraud measures tested for were: surprise audits, anonymous reporting mechanisms (such as hotlines), fraud awareness or ethics training, internal audits or internal fraud examination departments, and external audits. We mea- sured the median loss and length of time it took to discover the fraud depending on whether each antifraud measure was or was not in place (excluding all other factors).

We found that surprise audits, anonymous reporting mechanisms, and fraud training measures—the three least implemented antifraud measures—were also the most effec- tive mechanisms for reducing the cost and duration of fraud schemes. Organizations without these mechanisms in place reported frauds that cost twice as much and lasted

Exhibit 1.21

2006 National Fraud Survey: Percent of Cases by Number of Employees

<100

36.0%

Number of Employees

100–999

1,000–9,999

20.3%

24.8%

10,000+

18.9%

0.0%

10.0%

20.0% Percent of Cases

30.0%

40.0%

36

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