PREVENTING FRAUD IN THE WORKPLACE
by: Cary Christian

Most people are painfully aware that the likelihood of falling victim to fraud is much greater now than ever before. In large part, the Internet has become a major tool for those who seek to commit fraud. But the vast majority of business fraud still occurs offline and is carried out by employees of the defrauded business.

As a small business owner you may not worry much about internal fraud. Generally, small businesses are not as susceptible to fraud as large businesses are because the owners are better able to monitor and control the business without delegating sensitive responsibilities. But that does not mean that fraud cannot and does not occur. It does. And as your business grows, the opportunities for fraud will increase dramatically. In fact, the single greatest factor in someone deciding to commit business fraud is ORGANIZATIONAL OPPORTUNITY. If your business provides the opportunity, someday someone will take advantage of it.

For example, if the same person in your organization handles the billing, the posting of cash receipts, write-offs, and makes all bank deposits, what's to prevent them from someday making off with some of your hard earned cash and using their position to cover it up? You've given them the opportunity. If they ever find themselves strapped for cash, even the most moral employee might be tempted.

It is far easier to prevent fraud than it is to detect fraud after it has been committed. Establishing an effective fraud prevention program requires thought and sustained effort, but the steps to implementation are relatively simple. Let's look at a few things you can do.

1. Always enforce vacation time. Most employees who commit fraud put themselves in a position where they must remain on the job continuously to cover up fraudulent activities. Just knowing they must take vacation every year is a deterrent because it increases the risk of getting caught.

2. Properly assign authority and responsibility for business functions. Like the example above, do not give a single employee control over all the functions required to cover up fraudulent activities.

3. Utilize job rotation. If an employee must periodically rotate out to another job function, he or she will realize the risk of discovery is much higher. Like enforced vacations, this can be a powerful deterrent.

4. Utilize surprise audits. Even if you do not have internal auditors, have your accountants come in periodically and audit specific functions of your business where fraud opportunities are most likely to occur. The purpose of these surprise audits is not necessarily to uncover fraud, but to let employees know that it is likely to be uncovered if committed.

5. Effectively communicate your company's policies on fraud. Make sure every employee is aware of what activities constitute fraud, what the punishments will be and the tools you are using to combat fraud. Let them know that enforced vacation time, job rotation, etc. are designed to deter fraud. When employees know you are proactively seeking to detect fraud, the communication itself becomes a deterrent. Increase the perception that fraud will be detected. Also, be aware that it can sometimes be difficult to fire an employee, even when you have uncovered fraudulent activities, if you have not appropriately communicated your policies and what constitutes unacceptable behavior.

6. Establish economic incentives for voluntary compliance with your fraud prevention program. Make it worthwhile for your employees to join the fight. Set up formal procedures for employees to use to report fraud. Set up a reward structure.

7. Minimize employee pressures by instituting employee assistance programs. Many times fraud is committed by employees who are undergoing severe hardships and have nowhere to turn for help. If you cannot afford a formal employee assistance program, at least have an open door policy where employees feel they can come to management for help when they really need it.

8. You must be willing to punish fraud when it is found, no matter how small. Of course, the punishment should fit the crime. Remember that somebody fudging their expense report might seem to be a minor issue, but it might be fudging an expense report today and absconding with thousands of dollars in skimmed receivables tomorrow. Once an employee learns small frauds are possible, larger ones are just over the horizon. You can use suspensions, demotions, salary cuts, probation, dismissals and referral for prosecution for differing levels of seriousness of the violation. If you are not willing to punish when fraud is found, your fraud prevention program will be useless.

Remember also that you must ensure your employees do not commit fraud in any way for the BENEFIT of your company. For example, your controller decides to commit tax fraud so the company can keep more of its cash. Your company is responsible for every act of its employees, whether it is aware of those acts or not and regardless of whether the company participates in the activity. And that means YOU as the small business owner are directly in the line of fire. So make sure your fraud prevention program covers outward-looking activities as well as internal activities.


Copyright (c) 2003