Now that we know Why Employees Commit Fraud…and How you Can Stop Them and the Different Types of Internal Business Fraud from prior blog posts, we can now look at how to prevent fraud in your business.
As we learned in our first blog post, the “Fraud Triangle” represents the three factors present when an employee considers some action resulting in fraud; those factors are pressure, rationalization, and opportunity.
Generally speaking, owners and top management are limited in what they can do to mitigate “pressure” and “rationalization” – except to treat employees fairly, pay competitive wages, and, most importantly, set a good, strong example of ethical behavior.
That is why the focus of a pro-active fraud prevention program is to limit an employee’s opportunity to commit fraud. This is best accomplished by having strong internal controls in place, including good segregation of duties.
Segregation of Duties
Segregation of duties is the concept of dividing several related tasks among multiple people so one person is unable to complete the entire process.
As a general rule, an employee should not be able to initiate, approve, and record transactions for a business. One employee having the ability to complete a transaction from beginning to end leaves that area highly susceptible to fraudulent activity.
On the other hand, if those duties were properly segregated, the employee would have to resort to collusion with one or more employees to commit the fraudulent transaction.
Take for example the case of a former manager of a New York Stock Exchange company. He stole more than $1 million over the course of six years through false vendor payments to companies he created. The manager was responsible for approving vendor invoices and submitting them to the corporate office for payment. He set up fake companies and created fake invoices. The invoice payments ended up in the manager’s bank account.
By segregating the duties of employees, management is able to decrease the opportunity for employee fraud. Pressure and rationalization may still be relevant, but there is now little opportunity for that employee to defraud the company.
Internal controls, although extremely important, are not a 100% safeguard against internal business fraud.
However, there are many fraud prevention measures that can enhance the internal controls in place, for example:
- Setting a strong anti-fraud tone at the management level
- Holding anti-fraud programs and training periodically
- Highlighting fraudulent activities in the code of ethics
- Completing a fraud risk assessment
- Establishing a fraud “hotline” where employees can anonymously call in tips or observations of suspicious activities
- Monitoring by management of financial reporting, approval of cash disbursements; bank and other account reconciliations
- Tight control of master vendor file
When creating a fraud prevention program, you should consider all of the above methods. The risk of employee fraud can vary from business to business, so an anti-fraud program should be tailored to your own business and needs.
If you suspect internal business fraud, or would like an assessment of your fraud prevention measures, contact Apple Growth Partners about our Fraud Investigation and Forensic Analysis services at 330.867.7350. Also, check out our post on The Different Types of Internal Business Fraud.