Businesses today face many risks and dangers that they must develop systems and methods to overcome. In fact, risk is central to the concept of entrepreneurship. Being able to create products and services that have value to the consumer is a true success in itself. Beyond that, a company has to face competition, technological and equipment issues, laws and regulations, external threats such as theft, and a multitude of internal issues. In particular, internal fraud is an issue that all companies, regardless of industry or size, must learn to keep under control or hopefully even eliminate.
Fraud is a broad concept that covers many issues. “Fraud is any and all means a person uses to gain an unfair advantage over another person” (Romney & Steinbart, 2006, p.146). In light of some of the risks listed above, fraud may seem like a minor issue that only concerns the largest businesses, but this is not the case. According to one organization:
Here are some shocking statistics:
• $652 billion in revenues are lost annually to fraud, or 5% of total revenues
• The average fraud scheme lasted 18 months before it was detected
• Organizations lose 20% of every dollar earned to some type of workplace fraud
• Fraud reduces net income dollar for dollar, meaning that if the profit margin is 10%, an additional $100,000 of revenue would have to be generated to cover a $10,000 fraud (Upcoming Events , 2006)
There are two categories of internal fraud, misappropriation of assets and fraudulent financial reporting. Each of these issues requires different but equally important internal controls to ensure they do not ...