How? By not providing adequate oversight. A clerk, for example, sees that an error in an account wasn’t caught by anyone. A purchasing manager notices that no one is watching over his vendor relationships, and won’t know it if he establishes a fake account. Employees are not stupid. They know when they are being monitored and when their work is being checked. They know when they are working in an environment ripe for fraud.
But you have honest employees, you say? You’re probably right. If we thought job applicants were criminals, we wouldn’t hire them. But situations occur where the temptation to steal simply becomes too much. Imagine owing money to a hospital or having an expensive (and necessary) car repair that you can’t afford. What if your child needs clothing or food? There may come a day in your life when your morals are challenged because you have a financial need and an opportunity at the workplace that seems too good to pass up.
Management can discourage employee theft and reduce its risk of fraud by taking some basic steps. The key to all of these strategies is creating a work environment where employees know that honesty is monitored and theft will be discovered.
Physical Security: The first step involves examining a company’s physical security and control over assets. Consider a company in which doors are regularly left unlocked or sensitive financial information is not secured. Employees see these lapses in security and may take advantage of them. Make sure all entrances and sensitive doorways are locked and monitored. A key card system is even better than just locking doors, since employees understand that management knows who’s accessing what areas.
Make sure that sensitive information, both on paper and in the computer system, is properly secured. What starts out as a curious employee could easily turn into fraud because confidential information is readily available. Monitor who is accessing data and when they’re doing it, and make sure employees know that there is a paper trail for their activities within the company.
Audits and Reconciliations: The next important step in reducing fraud is the implementation of surprise audits and regular reconciliations. Employees should be aware that management is checking their work. Consider having internal audit staff or managers make routine audits of departments. These might include surprise cash counts, verification of authorization for transaction, reconciliation of detailed records account balances, and spot checking of documentation. The procedures don’t have to be elaborate. If employees know their work could be checked at any time will be more likely to be honest and accurate.
Discipline: Dealing swiftly with fraud and abuse communicates to employees that management takes this issue seriously. Discipline is key, even in instances where a minor fraud is discovered. An internal discipline policy should be developed and communicated to employees. Make them aware of the range of disciplinary options, which might range from a verbal warning to a written warning to a suspension or dismissal.
When a fraud occurs, tell employees what happened and what punishment was received (keeping in mind that certain laws might prohibit employers from revealing identities). This will also demonstrate that management takes seriously its own directives and follows through with fair and appropriate punishment.
Consistency: The final basic step is treating employees consistently and fairly. Make sure that your punishment is in line with what is outlined in your employee code of ethics, and that you are in fact enforcing those rules. Whether an employee is working on the front line or in the executive offices, they deserve to have a punishment that fits the crime. It wouldn’t be fair to fire a front-line employee for a small inventory theft, while keeping on an executive who has manipulated financial statements to significantly increase his annual bonus. Employees understand fairness, so it’s important for management to strive to be swift but fair with any employee caught engaging in fraud.
Remember, corporate fraud prevention is not necessarily about creating a gigantic rule book. It’s more about setting the right tone and the right example for employees, showing through action (rather than words) that the company values its assets, is willing to monitor them, and will take action against employees who steal.