Fraud, embezzlement, misappropriation, structuring … these terms are every business owner’s (and directorial board’s) nightmare. Media headlines of this type are popping up regularly, causing many businesses to begin taking notice and taking a closer look at their personnel and practices.
The Fraud Triangle
There are three factors that need to be present for fraud to take place: pressure or an incentive for committing the fraud (financial needs/gain, recognition, etc.), rationalization of behavior (the company “owes me” for all the work I do) and an opportunity (lack of controls and oversight). Of the three factors contributing to a fraud triangle, the one that can be best controlled by the company is the opportunity itself.
Set the tone atop a zero tolerance fraud policy. This can be done by creating a strong ethics policy to outline employee expectations, behavior and a culture of reporting non-ethical behavior. While the policy is the first step, proper implementation and follow-through of reported items is crucial to maintaining an anti-fraud culture.
Implement controls that provide a segregation of duties when dealing with financial records, billing, account payable, and most importantly, cash. Have an independent review of these controls audited by a third party auditing or accounting firm.
Becoming aware of fraud indicators in the company will alert management that an opportunity for fraud is present and should be addressed. These indicators include but are not limited to: unexplained variances between budgeted and actual amounts, internal control issues reported by external auditors, abnormal changes in account balances, unusual write-offs or other unusual transactions, missing or out-of-balance cash transactions and statement redirection.
Another indicator of potential fraud would be issues surrounding the employees directly, such as living beyond their means, never taking a vacation, disgruntled employees, those experiencing financial difficulties and those with substance abuse or gambling issues.
While it is possible for one or more of these issues to be present and not result in fraud, these indicators if acknowledged and addressed can help identify any weak processes and controls. In return, your company or organization will see a heightened awareness for fraud detection, which can help keep you out of the headlines.