"That's a huge number," says John Warren, CFE, associate general counsel for the Association. "If every business in the country lost that amount, it would represent a loss of $400 billion annually to our economy."

Fraud could be costing you thousands or even millions of dollars every year. Understanding fraud prevention and detection can help you halt the illegal flow of cash from your company's bottom line.

How does fraud happen?

One of the prime factors in committing a fraud is a "perceived financial need," according to the ACFE's Warren. "Financial need, or a person's financial crisis, often precipitates this type of crime."

Most individuals who commit fraud don't consider themselves criminals and often rationalize their actions. The more desperate people are, the more likely they are to commit fraud. Gambling, drug use, poor credit, loss of a job, a failing marriage or similar circumstance could lead an employee to commit fraud. Since the economy is in recession, opportunities for fraud also increase.

Most fraud cases aren't even reported. Business owners often feel that they can handle the problem internally. Often they want to just move on, says Warren. "They recognize that, even if they managed to get a judgment against the employee, they probably wouldn't be able to collect. They feel victimized.

"A fraud reported by a publicly traded company could affect its stock price. It could also affect a company's standing in the industry. And a bank that experiences fraud would be greatly affected by a loss of consumer confidence," says Warren.

Some business owners are embarrassed that it happened in the first place. "It could be that a trusted, valued employee who's worked for them for years committed the fraud and they don't have the heart to initiate criminal action," says Don Bays, director of litigation and business valuation services for the accounting firm of Henry & Horne, PLC in Tempe, Ariz.

For example, Bays suggested a review of internal control practices for a group of four physicians. "Three didn't think it was necessary, but said go ahead. A fourth said the bookkeeper had been with them for eight years and that he trusted her so much that she also kept his personal checkbook," says Bays.

This one person made the daily bank deposits, performed the monthly bank account reconciliations and, in the space of one year, managed to steal $8,000. "The physicians were stunned, but did not press charges. The main reason she did this was that she had a young son with medical problems that were not covered by her health insurance."

What makes business owners so vulnerable to employee fraud? Perhaps it's their willingness to trust people. By their very nature, business owners tend to be more trusting, outgoing and gregarious. However, they need to take themselves outside of the situation and ask, "Given the current structure of my company, what opportunities exist? And how do I prevent them?"

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