Fraud and misconduct can drain earnings; expose your company, management and you to criminal and civil liability; and, worse, threaten your most valuable asset--market reputation.

Private companies are more at risk: The Association of Certified Fraud Examiners (ACFE) found that 42 percent of all fraud and employee theft occurs at private and family-owned companies, a much higher rate than for public companies.

Effective fraud management programs almost always provide significant cost savings. The ACFE estimates that U.S. companies lose 5 to 7 percent of their annual revenues to fraud and, more important, studies show that companies receive a 7:1 return on preventative and detective antifraud programs.

For instance, a private mail order business identified the potential for kickbacks from commercial printers with whom they partnered. Acknowledging the fraud risk, the company centralized procurement of printing services thereby both eliminating the risk that the account managers would be corrupted and leveraging its purchasing power to gain better terms.

Antifraud programs are also a critical safeguard for brand value and reputation. In a survey of CEOs conducted by The Economist entitled "Reputation: Risk of Risks," reputation was identified as the most significant risk threat to business, with 84 percent of respondents noting that risks to their company's reputation had increased significantly.

Finally, fraud management programs afford competitive and strategic advantages to companies that are expanding. For example, a pharmaceutical company outsourced production to a Chinese manufacturer, which packaged and sold drugs that failed to meet company specifications. As a preventative and detective measure, the company leveraged China's low labor costs to install inspectors at the manufacturer, which reduced risk.

As companies and the business landscape change, so does their vulnerability to fraud. An effective fraud and misconduct management program for private companies should follow five simple steps:

* Create "Tone at the Top"

* Gauge Fraud Risk

* Control Activities

* Perform Monitoring

* Implement Incident Response and Remediation

A multinational private candy manufacturer, for example, trained its business unit finance directors on a broad range of fraud management issues, including its overall benefits; common fraud schemes affecting consumer companies; identifying and assessing fraud risk; developing transaction-level antifraud controls; fraud monitoring and auditing; and incident response and remediation.

The company encouraged business units to request assistance to address risks that were inadequately mitigated. Assistance included suggestions for enhanced controls, or, if controls were not practical, periodic auditing.

The finance directors welcomed the assignment even though the project entailed more work. They recognized that the company was vulnerable to fraud and misconduct risk and that they, as finance directors, would be held accountable.

Most fraud is detected by chance, and chance is not a sound business strategy. Fraud management will help your company maintain confidence in the integrity of its financial results, reduce costs, improve profitability, protect its reputation and mitigate liability.

Article from: Chief Executive (U.S.) Article date: October 1, 2006