An Ounce of Prevention

If you haven’t heard by now, internal fraud is expensive, costing companies an average of 6 percent of revenues each year. Employees are in an excellent position to steal the company blind. Particularly for those in upper management, access to assets is easy to come by.

With an estimated $3.7 trillion stolen annually by employees around the globe, companies should be highly motivated to invest in fraud prevention. Creating and implementing effective policies and procedures is not cheap, but it is far less expensive than exposure to internal fraud.

Companies should develop a comprehensive fraud prevention program that impacts all areas of a company. Such a program has three critical parts: education, investigation and proactive prevention.

Education
Internal fraud is most commonly discovered through tips from employees, customers or vendors. Since employees are inclined to report misdeeds, it makes sense to give them the knowledge to help the company. Company-wide education of employees is, therefore, an integral part of a fraud prevention program.

I recommend broad-based fraud education for all employees. More specific anti-fraud training should be presented by department and position within the company.

It can also be helpful to include rank-and-file employees in the development and presentation of anti-fraud training. They see the daily workings of the company and may be able to identify high-risk areas. Further, the inclusion of peers in the training may help connect with front-line employees.

Investigation

While fraud prevention efforts are aimed at stopping theft, the need for investigations will never be abated. In fact, investigations have a deterrent effect on would-be thieves. When employees believe management is actively seeking out fraud and punishing offenders, they are less likely to commit fraud.

Effective investigations should have a well-defined plan, a reasonable division of duties, and a central point of contact. As evidence is gathered and witnesses are interviewed, it is important to bear in mind that this information may someday be presented to a court.

Ideally, the need for investigations will decrease as your company’s fraud prevention efforts increase. However, it is necessary to have resources available to conduct competent investigations.

Proactive Prevention

The most extensive part of a comprehensive fraud prevention program is the creation and implementation of proactive preventive techniques. These policies and procedures should go above and beyond traditional internal controls and government regulations.

Effective anti-fraud policies outline expected behaviors and encourage disclosure of conflicts of interest. “Tone at the top” may be an over-used cliché, but it really is an important part of any anti-fraud effort. It is unrealistic to expect honesty from lower-level employees when management is not truthful.

Every proactive procedure should have a true purpose relative to the prevention of fraud. It is useless to have ineffective controls just to say “we did something.” For maximum effectiveness, consult an anti-fraud expert. Those who have investigated hundreds of frauds are in the best position to develop the most relevant controls.

Development of a good prevention program is serious business. It can take up to two years to implement a full-blown program. The process really never ends, however. A company committed to fraud prevention will continuously monitor and improve control policies and procedures.

Pound of Cure
It may sound daunting to implement all three parts of the fraud prevention program at once. It is true that fraud prevention is not an easy process, and it is not completed in a few weeks.

An effective program can be implemented efficiently with the right people and the right expertise. It may be complex and time consuming, but the cost and pain to implement effective controls is small in comparison to actual losses.

Each and every step toward better fraud prevention controls is important. Small steps are better than no steps, and companies can slowly build upon small steps to work toward a more comprehensive plan.

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