Stop Fraud Before It Starts!
January 24, 2016
Business fraud occurs everywhere. It happens in large companies, small businesses, profit entities, non-profit organizations, big cities, and rural areas. The perpetrator might be a Baby Boomer, GenX, or Milliennial. It doesn't matter. Dishonest employees have no preferences or age restrictions.
The fraud is usually discovered by accident or through tips and most frequently is a valued, long-term, and trusted employee. While a large company might be better able to sustain a sizeable fraud loss, a small business might not ever be able to recover from a devastating loss and eventually forced to close. What a terrible way to have to cease operations!
From fraud studies, it is known that the average fraud is not detected for 18 months and the longer a perpetrator works for a business, the higher the fraud loss. With this in mind, it is far better to stop fraud in the first place through prevention measures rather than to catch and stop fraud after it has been detected. Although there is no guarantee that preventive measures will stop and eliminate all types of business fraud, being proactive and taking control with the right actions will greatly diminish the chances of business fraud happening.
Risk Assessment Scoreboard
Ranking various risk assessments to determine areas in a business with the highest probability of potential fraud is a substantive starting point. A "scoreboard" can highlight where efforts should be concentrated to reduce the dangers of fraud. This includes all company activities. The safeguarding of cash, checks, inventory, supplies, equipment, purchases, payroll, and company credit cards are examples of tangible assets that must be assessed for risk. Likewise, intangible areas such as a company's communication process, employee training, mandatory vacation policy, background checks of new employees, job rotation, written company policies and procedures, and segregation of duties must be reviewed for possible weaknesses that might present opportunities for someone to commit fraud.
Each area should be reviewed in-depth for details of the specific operation and probing questions asked that might reveal potential fraud weaknesses. Following are example questions that might be asked. Does the company have an open-door policy for employees to effectively communicate with management? Are receipts given for all sales including cash and checks? Could invoices be submitted for a non-existent company? Could ghost employees be added to the payroll? Obviously, numerous questions can be asked related to every activity in a business.
After the review, each activity should be categorized for the possibility of fraud to occur. The levels of possible occurrence can be characterized as being (1) almost nonexistent, (2) reasonably possible, or (3) very likely. Preventive measures can be taken first on those activities falling into the "very likely" category for fraud to occur. Preventive measures of an activity might involve more oversight, better controls, checks and balances, improved communication, training, employee engagement, fraud hotlines, or frequent audits. Improvements should be tailor-made for each activity depending on how the activity is currently handled and the extent of corrections needed. The goal is to reclassify an activity from being "very likely" for the possibility of fraud to occur to the category of "almost nonexistent" for the possibility of fraud to occur.
Stop Fraud Before It Starts
Small, overlooked red flags in a business just might be the opportunity an unscrupulous employee is looking for to commit fraud. It might be small at first. The employee succeeds with some type of devious act obtaining the confidence needed to try again…and again and again. Before a business owner or manager knows it, the fraud loss can be substantial. Why let this happen? Practice fraud prevention to stop it before it starts.