Fraud Prevention: Proactive vs. Reactive

Preventing fraud by taking a proactive approach is an effective strategy versus reactively attempting to recover after fraud is committed.

Fraud is broken into three categories*: asset misappropriation, corruption and financial statement fraud. Of all three, asset misappropriation commandeers 90% of all fraud cases studied. Employees can scheme to steal or exploit its organization’s resources, stealing cash before it is recorded, and/or report a false expense reimbursement claim.

Financial statement fraud results in less than 5% of cases yet causes most losses. Schemes intentionally involve omitting or misstating information in the company’s financial reports in the form of fictitious revenues, hidden liabilities or inflated assets.

Corruption made up less than 1/3 of cases and occurs when bribery, extortion and conflict of interest influence business transactions for the benefit of the employee and the detriment of the company. The fraud cases studied in a 2014 report indicated such activities lasted approximately 18 months before being detected.

What is your fraud prevention plan?

Proactively:

1.      Perpetrators display increasingly aggressive behaviors and attitudes that can indicate anger, resentment or lack of appreciation. Committing a crime can be a vengeful act against an employer.

2.      Change to an employee’s work hours, adding to or subtracting from.

3.      Addition of new family members to the employee’s home – caring for a senior relative or a new baby.

Know your employees well.

4.      Reporting and Awareness. Honest employees are assets in the fight against occupational fraud with 40% of fraud cases detected because of a tip. Many employees are hesitant and fearful to report incidents; set up an anonymous reporting system.

5.      Minimize the number of employees involved in handling financial assets.

6.      Document your procedures. Document to verify receipts, withdrawals, deposits. Avoid using a signature stamp.

Revise, monitor and analyze business processes to ensure that effective and current best practices are utilized in the company’s policies and procedures while revising programs and services. Hire a Certified Fraud Examiner or a CPA who is Certified in Financial Forensics.

“Before one can become a great leader, one must be an obedient follower,” a quote from Early Nightingale shows that leading by example and holding individuals accountable no matter their position gives employees an open line of communication. The attitudes of the employees are a direct reflection of the leadership, or lack thereof.

*Reference: Stephen Reed, CPA