The average business loses approximately 5% of revenues to employee fraud. The employees are running off with money, fixed assets, and business opportunities. They are taking kickbacks from suppliers who overcharge for their products and services, and pushing contracts toward friends and relatives. Executives are manipulating financial statements to increase stock prices and impress lending institutions.
These types of dishonest activities can be decreased, however, by companies that take action to prevent and discourage fraudulent behavior. An extensive fraud prevention program might be the most effective way to reduce fraud opportunities, but following a recent flurry of regulatory requirements, many companies aren’t willing to invest more in revamping policies and procedures.
Activities that were traditionally thought to deter and detect fraud, such as independent audits and internal examinations, have been found to be less effective than previously believed. Those types of procedures may still provide some valuable business benefits, but they should not be relied upon as a primary tool for detecting and preventing fraud.
However, companies committed to creating and maintaining an ethical workplace in which to conduct business can still reduce their risk of fraud, even if they are not inclined to implement a full-blown fraud prevention program. As management employees lead with integrity, employees at all levels can be encouraged to also act with ethics in mind.
There are some simple steps that companies can take to reduce the risk of fraud and increase the chances of catching fraudsters in the act. By implementing these steps, management will show a commitment to anti-fraud awareness and action. Fraud prevention starts with creating and maintaining an ethical environment in which employees thrive.
There are five basic ways that companies can follow through on their commitment to integrity and ethical behavior.
1. Hire honest people.
Companies with good employee screening policies have taken one step in the right direction. It is important to weed out problem people before they become a part of the company.
Verification of past employment, college degrees, and references are important parts of good hiring decisions. An applicant with serious problems at a prior employer or with a dishonest resume is a bad candidate for your company.
Background checks are an additional layer of scrutiny that can add value to the employment screening process. These might include criminal records checks, civil records checks, and bankruptcy filings.
Information found during these checks can be important, especially if the applicant is being considered for an executive position or a job that requires handling of sensitive data. Hiring managers should trust their gut instincts when reviewing the application of a candidate that appears less-than honest, and opt instead for an employee who seems up-front from the start.
2. Fraud awareness training.
Educating employees on the basics of fraud can significantly enhance a company’s fraud prevention efforts. Tips from employees are one of the most common ways that companies detect fraud, so it makes good business sense to help employees identify suspicious behavior.
Be clear on what behavior is acceptable and what is not acceptable, as well as the steps to follow if questionable actions are witnessed. Make sure that employees know all of the ways to report suspect behavior, possibly including an anonymous hotline, a report to a direct supervisor, or a tip to the board of directors.
Employees who work in departments with increased fraud risks, such as the accounting department, should receive more in-depth anti-fraud training related to their job duties. Annual training updates are also important to refresh the memories of employees, as well as to remind them that the company takes fraud prevention seriously.
3. Create a positive work environment.
One of the key pieces of the fraud puzzle is a motivation commit fraud. An employee may feel pressure for good results or may be distressed about a disciplinary situation at work. These types of things may lead to fraud. On the other hand, creating a positive work environment in which employees feel secure in their positions and confident in the company helps combat the problem.
Open-door policies encourage employees to seek counsel when they feel pressured or unfairly treated. Those who are worried about lackluster performance or poor job skills should also feel free to seek out assistance from management.
Employees value job security, flexible rules, opportunities to succeed, and responsive management. Creating this positive type of environment indirectly discourages employees from committing theft at work.
4. Create a code of conduct that is understood and respected.
Employees need a comprehensive, yet concise, code of conduct that clearly outlines expected behaviors. Certain prohibited activities should be specifically outlined in addition to the general do’s and do not’s contained in the code.
Executives should model ethical behavior, as the tone-at-the-top can have wide-reaching effects on employees as a whole. When employees witness unethical behavior by management, it sends a message that dishonesty is tolerated. Therefore, a strict zero-tolerance policy for all levels of employees should be observed.
All employees should receive periodic reminders of the code of conduct to reinforce the company’s expectations for ethical behavior. They should be given an opportunity to ask question in order to fully understand the expectations that are laid out for them.
5. Offer employee assistance programs.
As previously mentioned, pressures in an employee’s personal and professional life could give way to fraudulent behavior. A financial problem, a pending divorce, or a substance abuse problem could create stress that results in fraud. Employee assistance programs can help employees to properly manage the stresses in their lives, and this will hopefully decrease their propensity to commit fraud.
Nothing will completely prevent fraud from occurring in organizations. People make mistakes and take advantage of opportunities from time to time.
While there will always be dishonest people who exploit weaknesses in a system for their own financial gain, companies bear the responsibility of implementing policies and procedures to help reduce the opportunities for fraud. By taking steps to encourage ethical behavior, management can significantly reduce a company’s internal fraud risks.