Occupational fraud prevention & detection require a company to set up a reporting system, implement internal controls, & engage employees.
In Part 1, we talked about three types of fraud, and the “fraud triangle”. In Part 2 we will discuss fraud prevention and detection to reduce losses. Preventing fraud is much easier and less costly than recovering losses caused by fraud.
Have a Fraud Prevention Plan and Create Awareness
It can take an average 18 months for fraud to be detected (ACFE 2014 Report), and great losses can result from this on-going “bleeding” of a company. However, having a fraud-prevention plan in place can minimize fraud by implementing procedures and controls.
Everyone in the organization should be made aware of the fraud prevention plan, policy, and CONSEQUENCES.
Set Up Reporting System
Over 40% of occupational fraud is detected because of a tip from employees of an organization, acquaintances of the fraudster, customers, vendors, and competitors (ACFE 2014 Report).
Setting up an anonymous reporting system, such as a tip hotline, can facilitate employees to report fraudulent activity while keeping their identity safe.
On the one hand, the system deters would-be fraud perpetrators by making them aware that the management has developed a system of controls to watch out signs of fraud; on the other hand, it encourages employees and management to be observant and report signs of fraud and theft.
Implement Internal Controls
To safeguard a company’s assets, ensure the integrity of its accounting records, deter and detect fraud and theft, procedures of internal control should be implemented, such as:
- Segregation of duties
- Require two signatures on checks above a specified dollar amount
- Verify new vendors to avoid billing-scheme embezzlers setup
- Monitor and update internal control programs on a consistent basis
- Consider hiring a professional experienced in setting up and updating an internal control process or fraud prevention program. The expert can analyze policies and procedures, recommend appropriate programs and assist with implementation.
Unfortunately, fraud is often committed by “loyal” employees least expected to be fraudsters. Know your employees and engage them in conversation often. If an employee feels grossly under-appreciated, mistreated, and the disgruntled employee’s grievances are not timely addressed, s/he may commit fraud to get back at management.
Management needs to regularly take time to get to know employees and their financial stressors. This can also make the organization a healthier place with happier employees.
- Monitor Vacation Balances
Employees who haven’t missed a day of work in years could be afraid that their fraud will be detected while they take a vacation.
- Rotate employees to various jobs within a company. This can expose fraud.
- Take external information into consideration to link with internal data in detection plans.
Improve Fraud Prevention with Fraud Detection
The results of fraud detection plans can improve prevention controls.
Document fraud detection strategies and each task performed by specific individuals or teams. Let all employees know about the final fraud detection plan and how it will be implemented, this is one of the best ways to deter fraudulent behavior. When an organization follows through to enforce consequences when someone is caught, it serves to prevent future fraud.
Without prevention and detection, occupational fraud can result in huge financial losses, legal costs, and reputation damages in large or small companies across all industries. Having plans in place and implementation thereof can minimize losses caused by internal fraud. It makes great economic sense since it costs a lot less to prevent fraud than dealing with losses caused by fraud.
(The above is based on information from:
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