Occupational fraud continues to wreak havoc on businesses around the globe with the typical organization losing an estimated 5 percent of annual revenues to fraud, based on the Association of Fraud Examiners. Fraud experts have long suggested that the presence of three conditions, known as the “fraud triangle,” greatly increases the likelihood that an organization will be defrauded.

The Fraud Triangle

Make sure you’re management team understands the three categories of the fraud triangle. It may help identify employees that are prone to engage in fraudulent behavior.

Pressure

A perpetrator experiences some type of pressure motivating the fraud. Pressure can come from within the organization for example, pressure to meet aggressive earnings or revenue growth targets. Alternatively, the pressure could be personal, such as the need to maintain a high standard of living or pay off debt from credit cards or gambling.

Rationalization

Perpetrators must be able to mentally justify their fraudulent conduct. Convincing themselves they will pay back the money before anyone misses it, or for reasons such as: They are underpaid and deserve the stolen funds

• “Everybody” does it
• There is no other solution
• Their employers can afford the financial loss
• They’ll lose everything (or someone) if they don’t commit fraud

Most employees who commit fraud are first-time offenders who don’t view themselves as criminals, but as honest people caught up by circumstances beyond their control. By rationalizing, they overcome ethical barriers that generally guide their conduct.

Opportunity

Without opportunity, even motivated and rationalized offenders can’t commit fraud. Occupational thieves exploit perceived opportunities they believe will allow them to go undetected. Poor internal controls, weak management oversight, and ineffective or nonexistent audits all create opportunities for fraud.

Steps to Prevent the Fraud

Minimizing the risk of fraud can be a daunting task for management, but if done correctly it can save an organization from investment losses, legal costs and much more. Doeren Mayhew’s forensic accountants and Certified Fraud Examiners offer proactive steps your management can take to help prevent the occurrence of fraud.

Keep it Simple - Lead from the Top

The more people conspiring in an occupational fraud, the higher losses tend to be. The Association of Fraud Examiners reported the median loss caused by a single perpetrator was $85,000, versus $150,000-$633,000 when more than two people conspired. So, what’s the best solution? Having proper oversight from the top to monitor financial internal controls and effective segregation of duty controls in place will go a long way. Owners or management should personally pick up bank statements and mail, or have an employee pick them up who has no related responsibilities to avoid any potential fraudulent activity. Take the time to review statements before they are reconciled and be on the lookout for unusual items, such as missing checks, checks issued out of sequence, unknown payees, altered checks or checks unsigned by authorized signatories. Limit access to accounts receivable records to avoid incidents issuing faulty credit memoranda, discounts and refunds. Investigate discrepancies reported by customers timely and ensure ledgers are balanced with the control account. Govern the general journal entries by reviewing them before approving. Pinpoint entries made to unrelated accounts, receivables or revenues at or near the close of a period, and those made by individuals whose responsibilities are inconsistent with the accounts being adjusted. Monitor and inspect unexpected variances in inventory. If you use perpetual inventory, you should be logging and performing periodic counts to ensure records are consistent with existing inventory.

Conduct Due Diligence

Good governance principles demand that management takes every precaution to protect its reputation, revenue, investments and more. To do this, management should be conducting periodic due diligence on records such as vendor listings, establishing an annual budget and creating annual performance targets. Intermittently review a list of your vendors and check for unknown or unfamiliar vendors. Pay close attention to vendor addresses and telephone numbers, and ensure they exist and do not match an employee’s information. When it comes to authorizing checks, if you have someone else signing them or sign checks blank, you may want to think again. You could be setting yourself up to fall victim to a fraudulent crime. You should be the only one administering checks and should never sign checks blank. If the bank is presented with a signed check, they will process it as a valid check as long as sufficient funds are available in the account. Establish a budget and reasonable performance targets. Calculating an annual budget is one task, but monitoring actual results monthly is another. Management should know where the company budget stands on a monthly basis and should be investigating any significant variances on a regular basis. Review your fidelity bond coverage periodically for adequacy. In the off chance an incident occurs, insurance coverage will serve as a safety net recovering the amounts pocketed from the perpetrator.

Observe Employee Behavior

From the hiring process to maintaining involvement with long-term employees, management should be consistently observing employee conduct. Before they walk in the door on their first day of work, a thorough background check should be completed on all new employees. Make sure human resources contact former employers, references and educational institutions to ensure the information provided during the application and interview process is truthful. Take note of time period gaps in employment, educational history or reasons for terminations, as these may be signs of behavior you may not want in your workplace. As part of your fraud detection policies and procedures, consider rotating employee duties. It provides a strong disincentive to commit fraud and may reveal fraud that is already occurring. As a key part of management, you’re at the top overseeing the company, but how regularly involved are you with employees? Overseeing staff and staying actively involved with employees on a day-to-day basis allows you to become acquainted with staff and also positions you to observe anything that becomes unusual. Changes in behavior that are inconsistent with employees’ normal disposition, such as dissatisfaction with compensation, gambling, drug use, financial distress and serious illness could all be strong indications there may be something more going on.

Open Lines of Communication

Based on the Association of Fraud Examiner’s most recent Report to the Nations publication, the number one detection of fraud schemes globally is tips with nearly 52 percent of them coming from employees. If you keep an open line of communication with employees, they may feel more inclined to report something they are seeing or hearing about. Implement an employee hotline or suggestion box to encourage employees to bring fraud occurrences to the forefront. These sources of communication allow staff to communicate with management anonymously, if preferred. Additionally, communicate expectations with employees. Often times employees may not know they are even committing fraudulent acts. Consider reviewing the training they are receiving to ensure they are performing their role accurately. Review policies and procedures with them and validate they know the consequences of committing fraud. If fraudulent activity is going on, take strong action against employees who are committing the crime. Get law enforcement involved immediately and press charges. This sends a message to employees that this type of behavior is not tolerated.

Stay Proactive

Fraud can be damaging to your company’s reputation and financial resources. Having the appropriate anti-fraud controls in place are critical to proactively identifying and managing risks before a disaster hits. You may want to consider hiring outside professionals like Doeren Mayhew’s CPAs and Certified Fraud Examiners to help you put an effective internal controls program in place to safeguard your business, or just be there to help during your time of suspicion. Contact them today.