Fraud Prevention in Real Estate Companies
Fraud – it’s an unfortunate reality that impacts all businesses.
The trust that management builds with employees can be immediately destroyed when fraud is discovered. By the time management uncovers the illegal activity it’s likely the company has already lost tens of thousands of dollars. According to the 2016 Report to the National on Occupational Fraud and Abuse(report), real estate companies reported the 9th highest loss from fraud amongst 25 industries included in the report. The report reveals that of all companies surveyed, there were 41 incidents of fraud reported at real estate companies with an average loss of $200,000 per incident. While real estate companies face limited exposure to fraud, the average loss per incident is high enough that industry companies need to pay special attention to developing robust fraud prevention policies. To help clients, prospects and others understand fraud prevention best practices, Hanson & Co has provided a summary of key information below.
Common Fraud Prevention Techniques
- Segregation of Duties – This is a crucial step that every company should implement. Assigning different staff members to review and approve outgoing payments is an effective way to ensure improper behavior is not occurring. Some examples include, assigning different staff members to approve, record and report transactions. Also, when dealing with vendors be sure that the employee who generates the checks for payments is not responsible for signing them or making online payments. Finally, the employee who makes the bank deposits should not be permitted to reconcile the organization bank statements. Separating duties can go a long way in protecting the company and its assets.
- Repetitive Authorization – The purpose of repetitive authorization is to make it more difficult for a single person to steal from a company. Multiple layers of approval ensure that two separate sets of eyes review qualifying financial transactions. If there is something unusual about a transaction, it is more likely that attempted fraud would be discovered. One practical way to implement this is to require expenditures over a certain amount require two staff members to sign. It’s also a clever idea to require copies of vendor invoices or other documents to substantiate the need for payment. Remember, never pre-sign any checks and get written approval prior to making any credit card purchases.
- Background Checks – This is a crucial step to ensure that no one with a criminal history is working within the organization unknowingly. The report shows that a clear majority of fraudsters do not have a criminal background with only 5.2% of those involved with crimes had a past record. It also showed that 88% of fraudsters had never been convicted of fraud or a fraud related crime. So, while backgrounds checks are important they are not an effective tool when used alone.
- Establish a Fraud Hotline – Implementing an anonymous hotline will provide the opportunity for employees who are aware of wrong doing the ability to report it without fear of retribution. It’s quite natural to believe that fraudulent behavior will not be reported if there is fear that the reporter will lose their job or become a target of harassment or isolation. It’s important to note management must be aware of the value of such a program and the necessity to thoroughly investigate all incidents reported through the hotline.
- Employee Red Flags – According to the report there are red flag behaviors that are common among those who commit fraud. The top five red flags include living beyond ones means, experiencing financial difficulties, has an unusually close association with a vendor or customer, general “wheeler-dealer” attitude involving unethical or shrewd behavior, excessive control issues (unwilling to share duties) and recent divorce or other family problems. It’s important to note that a clear majority of reported cases involved collusion of one or more company professionals.
Fraud is an unfortunate reality in the business landscape regardless of industry. The best thing companies can do is implement appropriate prevention measures that limit the opportunity for these activities to occur. If you have questions about fraud prevention or implementing an internal controls policy, Hanson & Co can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.