Employee Fraud: Why Enhancing the Perception of Detection Matters

Employee Fraud Prevention

Preventing fraud can be a long process that requires a multi-pronged approach to truly be effective.

First, the good news. The vast majority of your employees have no intention of stealing from your organization. The bad news? As you read this, there is likely a good chance that one of your trusted employees is committing fraud, or at least considering doing so.

Employee fraud, also known as occupational fraud, happens with alarming regularity. According to the Association of Cerfied Fraud Examiners (ACFE), organizations lose 5 percent of their annual revenue to fraud. The ACFE reports that the median loss associated with occupational fraud is $150,000, and it takes organization 18 months to uncover such activity. So, if an employee within your organization started stealing today, it will take months, possibly years before their conduct comes to light.

Why Do Employees Commit Fraud

Like most finance leaders, you probably struggle to envision what would drive an employee to steal. The ACFE notes how Donald Cressey, an American criminologist, determined that when an employee faces some form of pressure, such as money problems, as well as the opportunity to commit fraud and the ability to rationalize that they've committed a criminal act, fraud can happen. Armed with this information, what can your organization do to stop occupational fraud?

Raising Your Employees' "Perception of Detection"

One of the most effective ways to combat employee fraud involves raising the "perception of detection," which is an employee's belief that if they commit fraud, someone within the business will uncover their criminal activity quickly. Here's some of the ways that your organization can raise the perception of detection as well as improve its ability to uncover fraud before the losses have a chance to mushroom.

1. Communicate Expectations With a Fraud Policy

The vast majority of employees know that committing fraud is a criminal act. However, it doesn't hurt your organization's efforts to stamp out employee fraud to spell out exactly what constitutes fraud, and the ramifications for an employee that steals.

2. Remove Temptation by Thinking Like a Fraudster

While most employees will avoid the temptation to steal, if you can envision how to commit fraud, so can employees. Take the time to analyze fraud losses involving other organizations mentioned in the press. What went wrong? Does your organization have the same control weaknesses?

3. Use Risk Assessments to Shore Up Your Defenses

Conduct frequent risk assessments of your organization to identify the potential for fraud and the effectiveness of internal controls in detecting and preventing it. Ensure that there is an owner for each internal control who is responsible for ensuring its effectiveness.

4. Make it Difficult to Commit Fraud by Segregating Duties

Fraud thrives in secrecy. If an employee controls more than one element of a critical process such as the receipt and payment of invoices, the potential for fraud increases dramatically. If your organization cannot assign more than one employee to a process, consider adopting a job rotation program and mandating that employees use their allotted vacation. Businesses often discover fraud when an employee is on vacation or assigned to another department temporarily.

5. Keep Employees Guessing — Perform Surprise Audits

Employees that commit fraud don't want anyone to stumble across their scheme. Arriving unannounced to conduct a surprise audit of a department or critical process can make it very difficult to conceal incriminating documents associated with a fraud.

6. Be Proactive — Perform Bank Reconciliations

Ideally, your organization should reconcile its bank accounts on a daily basis. Employee fraud often goes undetected because no one knows exactly how much money should be in the organization's bank account. In addition to reconciling each account, ensure that bank statements cannot be intercepted, altered or destroyed by employees.

7. Give Employees a Voice by Investing In a Hot Line

If an employee suspects that a co-worker is stealing, they often don't know where to report their suspicions. An employee hot line, ideally managed by third party, can provide a way for employees to raise their concerns anonymously. Employees might view the hot line negatively, which is why it's important for finance leaders to position it in a positive light, and as a means of protecting the organization.

Preventing fraud can be a long process that requires a multi-pronged approach to truly be effective. Employees will likely always face financial pressures of one type or another. They'll likely always have the opportunity to enrich themselves at your organization's expense, and have the ability to justify their actions. Your organization's efforts to prevent fraud should leave employees asking one question, "Why commit fraud when they're bound to catch me?"