(This is the second of three posts on this topic)
By Associate Kimberly Creasey
All organizations, even the very small, can implement measures to help prevent fraudulent activity from occurring. Here are several items to consider when trying to improve procedures:
Implement Internal Controls
Many small businesses do not have a comprehensive structure of established and well tested internal controls. Internal controls are necessary to ensure reliable financial reporting, compliance with laws and regulations, and deter, prevent, and detect instances of fraud. Organizations that are smaller in size
frequently struggle with adequate segregation of duties, which is vital to preventing opportunities for fraud to occur. Segregation of duties is the concept that multiple people should be involved in a business function to provide a system of checks and balances and reduce the likelihood of abuse or error.
It is not uncommon for small organizations to have a general bookkeeper who performs a majority of the financial recording functions, however certain functions must be performed by different individuals to reduce the risk of fraud. For example, the bookkeeper should not be responsible for preparing cash/check deposits as well as the bank reconciliations because that would provide the opportunity for the bookkeeper to steal cash receipts, not record it on the deposit slip, and subsequently approve the bank reconciliation. Similarly, the person in charge of approving employees’ time records should not also have access to pay checks because this would allow for collusion between employees to falsify time records and share in the gain.
Another valuable internal control to implement is the requirement for employees to take vacation days. While it may appear that an employee is very dedicated and hard-working by never taking any vacation time, it’s also possible that the employee is engaged in a fraud scheme that would be discovered if another employee took over their role for a short period of time.
If you feel that your company’s internal controls are not sufficient, there are professionals you can engage to review your current policies and procedures, recommend additional controls and/or improvements where needed, and even assist with implementation.
Establish a system to report fraud
For the past decade, and likely well beyond, tips have been the most common way in which fraud instances are discovered. It is important to establish a secure method for employees to report known occurrences of fraud where they can remain anonymous and not fear any retaliatory action, such as dismissal. Offering a financial incentive may also help increase the number of tips received. This mechanism for reporting, commonly referred to as a “whistleblower hotline”, can be any of the following: a telephone hotline, a dedicated email address or fax number, online forms, in-person reporting, or a dedicated mailing address.
Each employee must be made aware of the organization’s fraud policy and receive regular “refreshers” throughout the course of their employment. They won’t be able to properly use the whistleblower hotline if they do not know what constitutes fraud within the company.
Be aware of red flags
Donald Cressey created the fraud triangle to describe the factors that can cause someone to commit fraud: 1) Perceived unshareable financial need, 2) Perceived opportunity, and 3) Rationalization. By getting to know your employees and a bit about their life outside the office, it is possible to pick up on behavior or situations that could fall into one of these categories. With respect to financial need, some issues to consider are: does an employee live beyond his/her financial means? Have trouble with alcohol, drugs, gambling? Is he/she going through a costly divorce or medical problems that may cause financial strain?
Perceived opportunity is a high risk for smaller businesses because they often do not have the controls in place to detect the fraud and the employee may feel confident that they would not get caught. Rationalization is harder to detect because it is not possible to know what goes through an employee’s mind. It’s important to be aware of situations in which an employee may feel slighted or unfairly compensated. Often times a fraud perpetrator can rationalize the bad behavior to him/herself by citing the overtime they work without additional pay, the raise or promotion they did not receive, or the long years they have spent working hard for the company so they have “earned” it. All of these factors can lead an otherwise honest person to commit an act of fraud.
Tone at the topCreating a positive work environment can help prevent fraud within the organization. Employees should be treated equitably and have the ability to voice opinions and concerns freely. Policies, procedures, and individual employee roles should be clearly stated and easy to access. It’s also important that management conduct themselves with honesty and integrity to set a good example for other employees.
To find out ways to enhance your company’s ability to catch acts of fraud, read part 3 of this article series titled “Detecting Fraud in Small Businesses”.
 Association of Certified Fraud Examiners Global Fraud Studies 2008-2016