While businesses are faced with threats of competition, economic changes, and rising costs, one of the largest threats to businesses can be fraud. Frank Abagnale, the author of Catch Me If You Can, believes that because punishment for fraud and recovery of stolen funds is so rare, prevention is the only viable course of action. If you make it easy for people to steal from you, they will.
Fraud comes in a variety of forms, including credit card fraud, check fraud as well as employee fraud. Some of the most common types of employee fraud include stealing assets either directly or through fraudulent billing schemes or check tampering. Employee fraud is a significant problem faced by organizations of all types, sizes, locations and industries. Management’s commitment to implementing internal controls and how well they follow their own internal controls sends a strong signal to all employees about the importance of internal controls.
The two primary internal controls are categorized as preventive and detective. Preventive controls serve to stop error or fraud from occurring. Detective controls are intended to reveal inconsistency, error or suspicious circumstances. While no company – even with the strongest internal controls – is immune from fraud, strengthening internal control policies, processes and procedures definitely makes companies a less attractive target to both internal and external criminals seeking to exploit internal control weaknesses.
Fraud usually happens for four primary reasons:
- Poor internal controls;
- Management override of internal controls;
- Conspiracy between employees; and
- Conspiracy between employees and third parties
Most of us take an “it won’t happen to me” approach to fraud. However, those who are willing to commit fraud do not discriminate. It can happen to anyone, so you need to implement steps to try to prevent it. The “fraud triangle” theory developed by Donald Cressey identifies the three elements that must be present for occupational fraud: incentive (“I need the money”), opportunity (“There is no one is watching”), and rationalization (“I am not getting paid enough for what I do”). Proper controls can help reduce the opportunity for fraud in your organization.
Most recent estimates from the Association of Certified Fraud Examiners’ Report to the Nation indicate that a typical organization loses 5 percent of its revenues each year to occupational fraud. That is a significant amount of money and indicates the need for constant evaluation of an entity’s internal controls and risk assessment plans.
So, how can you prevent fraud? Combating fraud before it occurs is vital to the survival of any business. While nothing guarantees protection from all thefts, there are steps you can take to minimize the opportunity to steal. Without appropriate and consistent procedures in place, employees can manipulate the accounting system to their benefit. We have listed some basic tips for you below.
- Educate your employees on what constitutes fraud, how it hurts everyone in the organization and how to report any questionable activity.
- Institute a policy of zero-tolerance for fraud. Communicate this policy to employees in writing, through words and by your actions.
- Management should set a good example for employees by making the “tone at the top” one of honesty and integrity.
- Trust is not the issue; verifying business transactions is. Giving a single person unquestioned authority over your finances is not a wise business practice under any circumstance.
- Perform unannounced crosschecks of payroll checks against work schedules.
- Require all office personnel to take at least five consecutive business days off every year. Open all mail in their absence.
- Review banking transactions online if you don’t receive paper statements.
- Pay close attention to your business. Dishonest employees are more tempted if they think that you are not watching them.
- Watch your cash, financial statement percentages and inventory levels.