How To Protect Your Organization From Fraud

I had a professor who worked for the FBI for a number of years, he told a story about ethics in the workplace and that the old saying among field offices was if you left a $5 bill on your desk while you were away it would still be there when you came back.”   He chuckled and then

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Photo credit: Mark Stone

mentioned that no one ever tried it because they knew it would not be there when they came back.  The point of the story is not to disparage the amazing work done by the FBI and the truly outstanding agents that work there, instead it is to highlight that no matter how ethical the people are that work for you-you should always be suspicious of occupational fraud within your organization.  I’m not suggesting hyper vigilance, more so putting into place policies, procedures, and best practices to prevent or detect fraud.

“Small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations. This gap in fraud prevention and detection coverage leaves small organizations extremely susceptible to frauds that can cause significant damage to their limited resources.” – ACFE Report to the Nation 2016 Executive Summary

First, it is important to understand some key elements of fraud, or the fraud triangle, wherein nearly every type of fraud will display these element. First is motivation, this is almost always monetary, such as someone who has a gambling problem, a spouse with high medical costs, or just an appearance to maintain.  Secondly is the opportunity, which is pretty obvious in most cases, if the chance exists for someone to commit fraud then eventually someone will.  Lastly is the rationalization where the fraudster justifies his actions to them self.  Usually they believe they’re going to repay the funds, or that they’ve been so mistreated by the organization that they deserve it, or that the company makes so much money no one will notice nor will it hurt the company.  Just understanding these elements alone will not help you necessarily prevent fraud, but at least they will help you understand the areas that are potentially at risk.

The truth is in some cases there is almost no way at all to prevent fraud entirely, such as cases of collusion, bribery, or any other fraud that involves more than one party, which is why it is extremely important to focus on detection of fraud once it is happening.  According to the Association of Certified Fraud Examiners, the number one detection method of fraud is tipsters.  That’s right, more fraud is discovered by way of another person coming forward to report the fraud than internal audits, external audits, or any other method for that matter.  This would suggest that the most important detection resource any organization can have is a dedicated, anonymous tip line that is monitored frequently.  It is also important to note that your HR department, or the person who conducts exit interviews, if you’re collecting them, can be a valuable resource.  This is because people like to air their grievances when leaving, and often these grievances of other employees can display red flags for fraud.

Some of the other methods for preventing fraud that your company should be engaged in are; strong internal controls with separation of duties, which can be the first line of defense for preventing fraud in the first place; external audits-even if your company does not need one, fraudsters fear that external auditors will detect fraud, and thus regular external audits help to prevent fraud; and recognition of warning signs such as an employee who has a flashy car but isn’t compensated appropriately for the car (or other flashy purchases), employees who never take a vacation or turn over duties, especially those managing accounts or accounting functions.  It is important to remember that you never want to falsely accuse any one of your employees of wrong doing, which is why it is important to take all tips of fraud seriously but to emphasize objective fact finding and healthy skepticism.  If you truly believe there is predication of fraud you should hire an outside investigator, such as a forensic auditor, to help with the investigation.

Please take the opportunity to follow this blog or comment below.  Also, if you are interested more in protecting your company from fraud and strengthening your internal controls, contact a CPA who should be able to help guide you through the process.  Linked here is the ACFE Report to the Nation Executive Summary if you would like more information on fraud.

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