As we enter 2018, employee fraud is a significant problem faced by many organizations of all shapes and sizes and is here to stay. Some business owners consider it a cost of doing business, while others are proactive and take steps to prevent it.
Many business owners believe employees are loyal, work hard, and have the benefit of the organization in mind. Although this may be true for the most part, things happen that are outside of our control and sometimes good people make poor decisions.
Taking a look in the mirror at your organization and considering the so-called fraud triangle in your own business may help you identify areas where your organization may be at risk.
In general, a fraud is more likely to occur in an organization if there is:
- Opportunity (insufficient controls),
- Rationalization (I deserve a raise, I’ll give it back, I’m just borrowing it, etc.), and
- Pressure (financial pressure, legal problems, problems at home).
These three items in combination allow fraud to occur. Consider the fraud triangle as a top level starting point to looking at holes in your organization so you can identify where your largest risks are and put a plan in place to mitigate those risks.
Fraud prevention is vital to any organization and it is important to have a plan in place. However, it is difficult to develop a plan if you are unaware of what to look for.
The 2016 Global Fraud Study revealed that the median fraud occurs over of a period of 18 months and the longer the duration, the larger the loss. The same study estimates a typical organization loses about 5% of revenues in a given year as a result of fraud.
Those who are proactive can minimize those opportunities using some of the strategies below. You may be doing some of these already.
Know Your People
One of the easiest things a business owner can do is simply know their people, their traits, and their tendencies. Have hiring practices in place to find the right person that fits the firm culture beyond their qualifications.
Listen to and observe your employees, as this may reveal issues that should be addressed. Keep in mind the larger the organization, the more difficult in may be to know your employees, which is why you rely on good hiring practices, a good management team, and making sure your employees know you have an open door policy. An absent owner, with a poor management team, is opening the door to fraud.
Educate Your Employees
We talk about fraud often, but do we ever really train our employees on fraud? Employees are used to seeing the type of fraud that occurs when a credit card is stolen, an identity is stolen, or there is a large breach of information -- not necessarily a trusted bookkeeper of 20 plus years skimming one thousand dollars a week over a period of five years.
Make employees aware of your company’s fraud risk policy, types of fraud, and the consequences that are associated with them. If those planning to commit fraud know that somebody is looking over their shoulder, they are more likely to be deterred as the opportunity they perceived to be there may not be. If you educate your employees, you may find that honest employees start asking questions when things look out of character and they may assist in uncovering any potential issues sooner.
Implement Internal Controls
Internal controls are implemented to safeguard company assets, ensure integrity, and deter fraud and theft. Segregation of duties is a key component to internal controls, but how many organizations (specifically small businesses and non-profits) have the capacity to segregate custody, recording, authorization, and reconciliation? There is a cost benefit to implementing many of these and one should consider which areas are at the highest risk first and build your controls based on your internal risk assessment. Once you have identified the controls that make sense for your organization to put in place, document them, train employees on them, and review them at least annually to ensure they are working as intended.
Certified Fraud Examiners (CFEs), Certified Public Accountants (CPAs) and CPAs who are Certified in Financial Forensics (CFF) can help you establish antifraud policies and procedures. These professionals can provide a wide arrange of services including internal control audits, forensic analysis, an internal control diagnostic review, and other general consulting engagements to assist in fraud prevention.
Why hire an expert? The world is getting smaller and information is coming faster. A manager 20 years ago did not have the capacity that technology has afforded us. With these great technological advances, they no longer need to sit in the room to steal from you. Banking, credit card, and other pertinent data are available at their disposal through the use of the same technology that has assisted in growing your business.
Hire an expert that can lay the groundwork to allow you to spend your time doing what you do best (running your business) and not in the weeds laying down controls that you are not experienced in.
Insure Your Business
Fraud is here to stay, just ask your insurance provider. Are you insured for damages caused by fraud, theft, or cybercrime? If no, you should ask your insurance provider what coverages are available.
You should also find out what your bank is willing to do in regard to protection for your business credit cards and bank accounts. You never plan on getting into a car accident, but it is nice to know that if something does happen, there is insurance to relieve the financial hardship that could result.
Fraud can happen to any business, larger or small. Occupation fraud can result in losses beyond money, including reputation, employee morale about the future, and loss of customers.
The world is getting faster, people are getting smarter, and the responsibility of a single individual is growing. Taking fraud lightly is exactly what the individuals hacking into your system now are hoping for. Eventually it may come knocking at your door. These are some of the things you can implement to safeguard your assets and protect the reputation you have spent a lifetime building.