The Fraud Risk Hiding In Your Organization

Posted by Shannon Walker

on June 16, 2013

The Fraud Risk Hiding In Your Organization

All organizations, regardless of size, are vulnerable to fraud in the workplace. Whether it’s embezzlement, theft, waste of product, forgery or cybercrime, fraud can assume many forms and continue unchecked for years. The financial and reputational impact of these improprieties can be devastating to a company. Establishing an effective loss-control strategy is an essential way through which to mitigate fraud.

The Association of Certified Fraud Examiners (ACFE) classifies fraud as;

1) Asset Misappropriation. The theft of something of value that belongs to your organization. It can be committed at the till, in billing, payroll, expense reimbursement, altering invoices or altering checks. While cash is the asset that is most frequently targeted, other scenarios could include inventory, equipment, surplus or services that are offered for non-business related activity.

2) Fraudulent Financial Records. “Cooking the books” to disguise a fraud, whether an asset misappropriation or perhaps to avoid tax. Most often to appease shareholders, raise capital or facilitate a sale. Financials can be falsified to generate rewards such as “bonuses”, too.

3) Corrupt or Prohibited Practices. These issues often involve hidden arrangements with customers, suppliers and or third-parties who provide services or material goods to an organization. Examples can include bribery, extortion, kickbacks and rebates.

A fraud control strategy is crucial to the detection, mitigation and future prevention of fraudulent activity. While some facets of a program may vary due to industry, jurisdiction and corporate structure, there are many things an organization can do to enhance their internal controls.

1) Fraud Awareness, Reporting and Deterrence Programs. Incorporate a whistleblower reporting system that provides for anonymous and confidential reporting amongst employees. train employees to identify fraud and provide them with relevant “case studies” or examples of fraud which they may encounter. Create a corporate culture that lends itself to the aggressive investigation of fraudulent activity, and stress a “zero tolerance fraud policy.

2) Employee Background Checks. Particularly for employees who will be handling cash, inventory and financials. Beyond verifying recommendations and employment history, screening for criminal history, credit reports and possibly drug testing.

3) Incorporate Vacation Policies. Require employees who hold financial positions to take regularly scheduled vacations and prohibit them from conducting company business while away. This is also a good time to perform any internal auditing.

4) Effective Oversight. Incorporate protocol which provides for the monitoring, review and supervision of financial related activities. This can include account auditing and trend analysis.

5) Gather Customer, Vendor and Supplier Feedback. By having a system in place which allows for feedback from those that are most intimately involved with the organization, stakeholders can often times detect and respond to fraud before it becomes something larger.

6) Cooperate with Investigating Entities. in the event of fraud, provide all resources required (documents, witnesses, code of conduct etc) to support commitment to the investigating entity. By demonstrating a corporate culture of zero-tolerance for fraud, and having anti-fraud protocols in place (including an ethics reporting system provided by an independent third-party), investigators are much less likely to take a hard-line with an organization. Numerous case studies provide evidence of significantly lower fines being levied against organizations that have ethics compliance programs in place.

Needless to say, fraud detection can be specialized to meet the requirements of various departments within a specific industry. Variance analysis, data mining, computerized tracking of specific information, supporting documentation review and targeted audits are ways through which organizations with very large operating budgets and complicated compliance requirements can monitor and detect potential fraud. However, the examples above should be a good template from which to navigate the potential hazards of fraud in the workplace.

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