Personal & Financial Strategies

Busiess Financial Strategies: Preventing Embezzlement

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Employee dishonesty can do untold damage and remain undetected for years. Here’s what your company needs to know about developing its own anti-fraud program.

Research over the past decade has shown that it is extremely difficult to predict who in an organization will commit an act of dishonesty. The incidents, which often go undetected for many years, are devastating to staff morale and shake the confidence of the organization’s consumers. Otherwise honest people engage in this behavior when they know controls are weak, no one is looking and the rewards greatly outweigh the risk of capture and punishment.

Employee dishonesty cannot be eliminated no matter what preventative measures are taken, but it can be minimized with a strong program of awareness and prevention.

Employee dishonesty frequently occurs while paying bills. When organizations are too small to employ enough staff to adequately separate duties, one employee might approve a vendor, put their information into the accounting system, approve the invoice, and create and mail the check. The vendor may be a shell company with fictitious invoices. Or, the vendor may be a legitimate business, but as a result of collusion with the employee, inflated invoices for goods – received or not received – may be paid. Without a strong system of controls, the books will balance, even though the fraud continues.

A comprehensive anti-fraud program will prevent this behavior. There should be strong policies to clearly indicate intolerance and ensure that consequences, including legal action, will result. Formal training on these policies is essential. Keep the policy positive – its purpose is to create a culture of honesty and integrity, where employees excel because of positive contributions.

The program needs to begin with hiring practices that emphasize diligent reference checks and a criminal background check. Ensure compliance by developing internal controls, conducting surprise audits, and establishing a formal whistleblower system that will guarantee anonymity of the informant. Create a culture where employees are trained to see the unusual. While an unusual action of another employee may or may not be a symptom of fraud, employees should be encouraged to confide in their supervisors.

An anti-fraud culture is also one that puts a high priority on the physical security of assets and records. Often, critical information is stolen simply because employees have sloppy habits. Keep desks clean and sensitive documents locked. System passwords should not be displayed on sticky notes or shared by employees. Checks should be doubly secured under lock and key, and bound with security tape. An example of a needed internal control is a procedure that includes an independent verification that the first check printed is sequential with the last check printed. This is a good compensating control leadership should execute when reviewing and approving bill lists.

Find a professional skilled in fraud prevention and investigation to assist in creating a fraud prevention program. In the long run, that will be faster and cheaper. Always enlist the assistance of these professionals when an incident of fraud is suspected or discovered. These professionals know how to conduct the investigation in a way that preserves evidence, protects the legal rights of the organization and the one suspected, and allows the work to continue without interruption. Finally, a forensic fraud report is the most effective and credible way to file an insurance claim for potential loss reimbursement, and these professionals can effectively serve as liaison and investigative support to the local police and State’s Attorney.

Fraud and employee dishonesty is often hidden in plain sight, but we know that the otherwise honest employee, who might contemplate a dishonest act, will be dissuaded if the risk of discovery is high. High-profile policies, good hiring practices, strong internal controls, a whistleblower system and effective use of a professional fraud prevention team raises the risk of detection. The potential fraudster knows that the entire organization is looking, making all the difference in preventing theft.

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