Employee Fraud Basics–Part 2

In the previous post Employee Fraud Basics Part 1, we addressed occupational fraud and mentioned that employers should focus on the one side of the fraud triangle over which they exert the most control: Perceived Opportunity.  Even if an employee is motivated to commit fraud the likelihood they will actually commit fraud decreases if the perceived opportunity is lowered.

Opportunity increases with:

  • Weak or nonexistent internal control structures
  • No perception by employees that the owner/manager of a company is in control or is knowledgeable

In general there are two parts to reducing perceived opportunity: Fraud Detection and Fraud Prevention.  Countless books, papers, articles and studies have been written on the detection and prevention of fraud. Our purpose herein is to provide some overall general guidance.

According to the Association of Certified Fraud Examiners’ 2010 Report to the Nations on Occupational Fraud and Abuse the two most common pressures employees feel are; 1) living beyond their means and 2) experiencing financial difficulties. An employer does not have much control over these pressures however one fraud detection method is to look for behavioral red flags:

–Look for indications an employee may be living beyond their means by taking extravagant vacations, buying luxury cars, a new home, a vacation home or expensive jewelry or dramatic change in style of dress.

–Look for indications an employee may be experiencing financial difficulties such as: spouse’s job loss, illness in family or having a vice (i.e. gambling).

Another way to detect fraud is:

Look internally for financial red flags such as; feeling like you’re working harder for less, new cash flow issues, increased supply purchase frequency and change in margins with no corresponding change in product/service price.

With respect to fraud prevention managers and owners of small businesses should focus their fraud prevention investments on the most costeffective mechanisms:

–Set an ethical tone for employees,

Keep open lines of communication with reporting mechanisms which allow anonymity and confidentiality,

–Encourage employees to report suspicious activity without fear of reprisal and,

–Focus on controls most likely to help prevent and detect the specific fraud schemes that pose the greatest risks.

–Studies have shown occupational frauds are much more likely to be detected by tip than by any other means and employee education helps prevent and detect occupational fraud.

–One of the most important controls a company can put in place is segregation of duties. One employee should not have access to assets, record keeping and reporting. This provides an employee with too many opportunities to steal and to hide it.

Knowledge and implementation of fraud detection and prevention method are keys to an organization’s ability to decrease fraud risk. Creating an atmosphere of perceived control goes a long way to preventing fraud. Focus on prevention before fraud occurs by conducting a thorough Internal Controls Analysis.

Hopefully this blog has provided some fraud detection and prevention basics to think about.  If you have any further questions or would like to discuss an Internal Control Analysis contact us.