Cunningham: Four common myths about fraud


Although business owners and managers are typically aware of the potential for fraud, there exist some gross misconceptions about it. Some of these myths may be the result of being in denial, while others may simply be a case of naiveté. Whichever the case, here are four common myths about employee fraud.

1. Our company does not have a fraud problem – Of course, all of us would like to believe that we have good employees and that the internal controls we have are adequate to catch any kind of fraud. The truth is, according to the Association of Certified Fraud Examiners (ACFE) Report to the Nations for 2016, the typical organization loses 5% of its revenues in any given year to fraud. So, all companies whether large or small are susceptible to employee fraud and cannot afford to ignore the risk.

2. Fraud will be detected by our auditors – This myth is fueled by the fact that management’s expectation of auditors is unrealistic in that they are expected to “catch” more than what they are hired to do. Contrary to management’s expectations, independent audits are not designed to detect fraud. They are designed to give “reasonable assurance” that the numbers shown in financial statements are materially accurate. The ruling bodies have attempted to address this issue and the current rules are somewhat better than in years past; however, a traditional audit still cannot be relied upon to detect fraud.

3. Only lower level management having financial trouble commit fraud – The notion that fraud occurs only at the lower levels of management has totally been debunked in recent years. One need only to recall the cases of the fraudulent accounting practices of Enron, WorldCom, the embezzlement that occurred at Tyco and the Ponzi scheme of Bernie Madoff to see that fraud is not uncommon at the CEO level. White-collar criminals who engage in fraudulent activity are driven by the same forces that others are, even though these executives have salaries in the millions. In the end, people from all walks of life commit fraud, from clerks to executives; no one is exempt.

4. Background checks will protect me from fraud – Recent research by the ACFE reveals that most occupational fraudsters are first-time offenders with clean employment histories. The vast majority of them had never been charged or convicted of a fraud-related offense, nor had ever been punished or terminated by an employer for fraud-related conduct. In these cases, companies can do thorough background checks, call references, and still may not find out that the person being considered is likely to commit fraud.

There are other misconceptions about fraud, but these should suffice to show that any responsible manager or business owner should seriously investigate the potential for fraud.

Dr. Bob Cunningham, CRMA, CIA, CFE is CEO of The Cunningham Group