6 STRATEGIES FOR FRAUD PREVENTION IN YOUR BUSINESS

Published on September 6, 2016

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Elric September

Elric September

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Claims Manager at CICL

Employee fraud is a significant problem faced by organizations of all types, sizes, locations and
industries. While we would all like to believe our employees are loyal and working for the benefit of the
organization (and most of them probably are), there are still many reasons why your employees may
commit fraud and several ways in which they might do it. According to the 2014 Report to the Nation on
Occupational Fraud and Abuse (copyright 2014 by the Association of Certified Fraud Examiners, Inc.),
research shows that the typical organization loses 5% of its annual revenue each year due to employee
fraud. Prevention and detection are crucial to reducing this loss. Every organization should have a plan
in place as preventing fraud is much easier than recovering your losses after a fraud has been
committed.

Types of Fraud

Fraud comes in many forms but can be broken down into three categories: asset misappropriation,
corruption and financial statement fraud. Asset misappropriation, although least costly, made up 90% of
all fraud cases studied. These are schemes in which an employee steals or exploits its organization’s
resources. Examples of asset misappropriation are stealing cash before or after it’s been recorded,
making a fictitious expense reimbursement claim and/or stealing non-cash assets of the organization.
Financial statement fraud comprised less than five percent of cases but caused the most median loss.
These are schemes that involve omitting or intentionally misstating information in the company’s
financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.

Corruption fell in the middle and made up less than one-third of cases. Corruption schemes happen
when employees use their influence in business transactions for their own benefit while violating their
duty to the employer. Examples of corruption are bribery, extortion and conflict of interest.

Fraud Prevention

It is vital to an organization, large or small, to have a fraud prevention plan in place. The fraud cases
studied in the ACFE 2014 Report revealed that the fraudulent activities studied lasted an average of 18
months before being detected. Imagine the type of loss your company could suffer with an employee
committing fraud for a year and a half. Luckily, there are ways you can minimize fraud occurrences by
implementing different procedures and controls.

1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud.
Observing and listening to employees can help you identify potential fraud risk. It is important for
management to be involved with their employees and take time to get to know them. Often, an attitude
change can clue you in to a risk. This can also reveal internal issues that need to be addressed. For
example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this
could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay
close attention to that employee. This may not only minimize a loss from fraud, but can make the
organization a better, more efficient place with happier employees. Listening to employees may also
reveal other clues. Consider an employee who has worked for your company for 15 years that is now
working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the
employee reveals that in addition to his new, heavier workload, his brother lost his job and his family
has moved into the employee’s house. This could be a signal of a potential fraud risk. Very often and
unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your
employees and engage them in conversation.

2. Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk
policy including types of fraud and the consequences associated with them. Those who are planning to
commit fraud will know that management is watching and will hopefully be deterred by this. Honest
employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or
theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most
occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the
organization, other important sources of tips are customers, vendors, competitors and acquaintances of
the fraudster. Since many employees are hesitant to report incidents to their employers, consider
setting up an anonymous reporting system. Employees can report fraudulent activity through a website
keeping their identity safe or by using a tip hotline.

3. Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your company’s assets,
ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of
duties is an important component of internal control that can reduce the risk of fraud from occurring.
For example, a retail store has one cash register employee, one salesperson, and one manager. The cash
and check register receipts should be tallied by one employee while another prepares the deposit slip
and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.
Documentation is another internal control that can help reduce fraud. Consider the example above; if
sales receipts and preparation of the bank deposit are documented in the books, the business owner
can look at the documentation daily or weekly to verify that the receipts were deposited into the bank.
In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use “for
deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar
amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers
setup and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are
effective and current with technological and other advances. If you do not have an internal control
process or fraud prevention program in place, then you should hire a professional with experience in
this area. An expert will analyze the company’s policies and procedures, recommend appropriate
programs and assist with implementation.

4. Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While these may
sound like loyal employees, it could be a sign that these employees have something to hide and are
worried that someone will detect their fraud if they were out of the office for a period of time. It is also a
good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity
as it allows a second employee to review the activities of the first.
5. Hire Experts

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in
Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These
professionals can provide a wide range of services from complete internal control audits and forensic
analysis to general and basic consultations.

6. Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear
organizational structure, written policies and procedures and fair employment practices. An open-door
policy can also provide a great fraud prevention system as it gives employees open lines of
communication with management. Business owners and senior management should lead by example
and hold every employee accountable for their actions, regardless of position.

Fraud Detection

In addition to prevention strategies, you should also have detection methods in place and make them
visible to the employees. According to Managing the Business Risk of Fraud: A Practical Guide, published
by Association of Certified Fraud Examiners (ACFE), the visibility of these controls acts as one of the best
deterrents to fraudulent behavior. It is important to continuously monitor and update your fraud
detection strategies to ensure they are effective. Detection plans usually occur during the regularly
scheduled business day. These plans take external information into consideration to link with internal
data. The results of your fraud detection plans should enhance your prevention controls. It is important
to document your fraud detection strategies including the individuals or teams responsible for each
task. Once the final fraud detection plan has been finalized, all employees should be made aware of the
plan and how it will be implemented. Communicating this to employees is a prevention method in itself.
Knowing the company is watching and will take disciplinary action can hinder employees’ plans to
commit fraud.

Conclusion
Those who are willing to commit fraud do not discriminate. It can happen in large or small companies
across various industries and geographic locations. Occupational fraud can result in huge financial loss,
legal costs, and ruined reputations that can ultimately lead to the downfall of an organization. Having
the proper plans in place can significantly reduce fraudulent activities from occurring or cut losses if a
fraud already occurred. Making the company policy known to employees is one of the best ways to
deter fraudulent behavior. Following through with the policy and enforcing the noted steps and
consequences when someone is caught is crucial to preventing fraud. The cost of trying to prevent fraud
is less expensive to a business than the cost of the fraud that gets committed.