How Much Fraud Do You Have?
Tom is an 18-year CFO for a large international corporation.
He said, “There’s simply no way our fraud losses are that big.”
He was referring to a recent published report by the Association of Certified Fraud Examiners claiming that losses equivalent to 5% of revenues were the norm. With global revenues of over $60 billion, in Tom’s case these losses would be $1.5 billion. I agreed with Tom, “You’re right. There’s no way. You would have been out of business long ago is that was the case.”
But now that I had his attention I pushed him by asking, “But what are your losses?” He had no idea.
I’ve had this same conversation with hundreds of client leaders. So far, only two organizations have been able to give me an answer that was based on their own internal analysis of losses. In both of those organizations, losses were in the range of one to two percent of revenues. And in both cases, we put into place a campaign to cut those losses in half in 18 months.
What are you losing to misconduct, wrongdoing and outright fraud?
In 25 years of addressing this question with my consulting clients, we’ve never calculated an actual loss amount of less that than one percent of revenues. To be fair, these clients are all from fairly large to huge organizations. Smaller organizations often experience losses below this threshold due to their ability to better monitor transactions.
Let’s assume for a second that your losses parallel what I see in real life. To be conservative (and believable!) let’s assume that your losses are only one percent of your revenue stream. One percent of anything doesn’t sound like a lot. So let’s use dollar amounts instead.
• 1% of $10 billion is $100 million
• 1% of $50 billion is $500 million
• 1% of $1 billion in revenue is still $10 million in untracked losses
Now let’s face it. If you were an owner or other senior leader of a billion dollar company, and you saw someone driving away from your offices in a pick-up truck with $10 million in cash, you would drop everything you were doing and stop them.
But when the losses occur slowly in a clandestine manner over time each day, for some reason we don’t pay them much attention. Death by a thousand paper cuts is still death!
Here’s what to do.
• First, assume your losses are one percent of annual revenues.
• Second, make a quick list of the top seven or eight areas where these losses must be occurring to reach your one percent target. Include inventory shrink, contractor and vendor overcharges, P-Cards, expense reimbursement, sales compensation and other financial incentives, and anything else that comes to mind. Don’t try to calculate amounts at this point. Just list the areas of potential loss.
• Third, meet with the leaders who oversee each of these areas and have a frank discussion about what they estimate their losses to be from any wrongdoing or theft. After all, they are the experts and should have a rough idea. Agree on a high and low range for each area of potential loss.
• Fourth, add these results together and see if they fall near the one percent of revenue amount. If not, keep digging.
• Last, put into place an Anti-Fraud Campaign that specifically targets these loss areas. Pledge to cut the losses in half in18 months. Remember, every single dollar you save goes straight to income.
If you’re having trouble getting started or simply can’t get others to accept that there are losses to address, let me know. I’ve helped hundreds of clients through this process and I can help you, too. No need to reinvent the wheel – it’s already available and ready to use. Just say the word and we’ll get started.
John J. Hall, CPA
John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”