Executives have the means to commit and cover up the largest frauds. They have access to the information and computer systems, they have power over all employees and they have access to the money. The finance function is riddled with fraud risks and the company’s executives are in the best position to take advantage of those risks.
Because of the risk of losing large sums of money to fraud by executives, companies must ensure owners and boards of directors are actively involved in creating and maintaining an environment that is not conducive to fraud. This involves active oversight of daily operations, continuous monitoring of potential red flags of fraud and swift action when fraud is discovered.
Creating and maintaining an ethical corporate culture is the most basic step to preventing internal fraud. Companies establish a culture that values honesty by creating a code of conduct that is practical and is enforced. This means that from the top of the company, all the way to the bottom, the rules governing ethical conduct are front of mind and are adhered to by all employees and members of management.
Ethical behavior must be a non-negotiable standard within the company, and no one should be exempt from the rules. The code of conduct also should include guidelines and mechanisms for reporting suspicions of unethical behavior. It must be clear that there will be no retaliation against employees who report co-workers, managers or executives.
Hiring the right employees is another major component of reducing fraud. Information on job applications and resumes should be verified and references should always be checked. While it may seem unlikely that these sorts of checks will uncover any damaging information, it is still important to do the work in case something is amiss.
Background checks, as permitted by law, are important, as well. The more sensitive the employee’s position, the more thorough the background check should be. Court records — including civil, criminal and bankruptcy — can give important clues to a potential employee’s background
Checks and Balances
Internal controls are needed to ensure fraud does not occur or that it is detected quickly if it does occur. True fraud prevention goes beyond simply complying with whatever regulatory mandates a company may be subject to. It requires the creation of policies and procedures specifically designed to address fraud risks.
If procedures are properly designed and implemented, there will be natural checks and balances between employees. Such procedures include segregation of duties, whereby accounting procedures are divided between employees so that no single employee monopolizes a process.
For example, the process of recording sales, billing customers, collecting customer payments and updating customer accounts should be divided between several people. This way, if someone tries to steal funds or manipulate accounting records, it will likely be caught by another employee who is recording or reconciling transactions in another part of the process.
There are many standard control procedures that can prevent and detect fraud, and they aren’t necessarily expensive to implement. Establishing these procedures will help increase the chances that fraud will be stopped. As an added benefit, the perception that fraud is being prevented and detected further helps deter employee fraud.
Despite the best efforts of management, fraud will occur in companies. When it happens, hopefully companies have procedures in place to catch the fraud early. It is essential that companies swiftly, certainly, and fairly deal with instances of fraud. Those responsible should be held accountable so other employees know there are consequences for unethical behavior.
Tracy Coenen is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at [email protected].