Faced with mounting problems from
the current recession, some employees may turn to stealing your organization’s hard earned cash to help pay for
their financial needs. A 2008 report indicated that 80 percent of executives surveyed
expect the current economic conditions to
have a significant impact on fraud control
in their organizations.
“Detected fraud may result in adverse
publicity, both internal and external, business disruptions, disgruntled employees,
legal liability and a possible increase in regulatory requirements,” says Rebekah Smith,
director of Dispute Advisory and Forensic
Services for GBQ Consulting LLC.
Smart Business spoke with Smith about
the red flags that indicate fraud is occurring in your company, what to do if fraud
happens and how to prevent it from happening in the future.
Why are businesses more vulnerable to fraud
in a down economy?
Three factors must be present for fraud
to occur — opportunity, need and rationalization. Opportunity is the availability of a
chance to commit fraud. For example, having access to cash or other assets gives you
the opportunity to commit fraud.
Everyone has financial needs. However,
the difference between someone who commits fraud and someone who does not is
rationalization. Only a person capable of
committing fraud can rationalize why he or
she must commit fraud. During an economic downturn, where employees are
facing real threats of losing their homes or
spouses losing jobs, an employee can better rationalize why committing fraud is permissible. Many frauds start out with the
employee thinking he or she is only borrowing money from the coffers. This is
rarely the case as it starts a slippery slope
from which few recover.
An Association of Certified Fraud
Examiners’ report published in 2008 estimates that 7 percent of all business revenue is lost to fraud, an estimated $994 billion annual loss for U.S. companies. The
recovery record is dismal. For defrauded
companies, only 16 percent recover all
monies that were taken, and in 42 percent of the occurrences, the companies recovered nothing. Investing money upfront in a
fraud risk analysis, designed to identify
areas where companies are vulnerable, can
pay dividends.
What are some red flags that indicate fraud
is occurring in your company?
Look out for employees living beyond
their means. If an employee’s compensation does not appear to be adequate to
cover his or her lifestyle, this should be
viewed as a red flag. Employees experiencing known financial difficulties may be
motivated to find ways to cover for their
financial shortfalls by committing fraud.
Employees who consistently attempt to
bypass internal controls either by overriding or ignoring controls are a red flag for
fraud. Lack of adequate segregation of critical duties, failure by employees in certain
positions to take vacation or delegate
duties and unquestioning trust of certain
employees tend to provide opportunities
for fraud to occur.
Be aware of any discontent among
employees. Discontented employees are more likely to commit fraud as they rationalize their actions either as not being criminal or as a form of revenge for mistreatment. Employees may also justify fraudulently acquired benefits as constructive
income for perceived underpayment.
How can leaders deal with fraud if it does
occur?
No. 1, react quickly and seal all loopholes
immediately. Do not underestimate the
need to bring in legal counsel and fraud
experts/forensic accountants. Legal counsel will provide advice on the next steps to
take, especially in relation to a suspected
employee. Attorneys also provide protection to management’s investigation with
attorney/client privilege. An independent
fraud expert will provide necessary skill
and experience required in fraud investigations and can even testify in court if a criminal or civil case is filed. Also, consider the
tone your action or inaction sets for other
employees. Inaction may be deemed as tolerance for fraud.
What steps can leaders take to prevent
fraud?
Leaders have to be in the forefront as
champions of integrity and ethical behavior. They have to create a culture that fosters and encourages honesty and does not
tolerate fraud. This has to be communicated to all employees, not only by word but
by actions. Put a system of internal control
in place. This system has to be understood
by all and regular review and audits should
be conducted. Educate employees on how
to recognize fraud and its negative effects.
Recent research has shown that more than
40 percent of all fraud is detected through
whistleblower tips. Provide a confidential
mechanism for reporting fraud when suspected. Many companies are now providing a hot line for anonymous reporting.
Employees need to be regularly reminded
of fraud risks to the company and the detrimental consequences of fraud on the
organization.
REBEKAH SMITH is the director of Dispute Advisory and Forensic Services at GBQ Consulting LLC. Reach her at (614) 947-5300 or
[email protected].
