What is a fraud policy?
A fraud policy is a ‘thou shalt not steal’ document that allows companies to communicate with their employees on the reporting procedures they should follow if they suspect that fraud is going on. Importantly, the policy should be written and signed on an annual basis by all employees, from the top down. It sets the tone by specifying that fraud will not be tolerated at any level of the work force and lays out the consequences to employees.
All employees who sign the policy acknowledge that they have not perpetrated economic crimes and do not intend to in the future. The signed document is a valuable tool should they commit such a crime and fall back on an excuse like they were only ‘borrowing’ the money, as unauthorized ‘borrowing’ is a fraudulent act.
What makes up an effective fraud policy?
An effective fraud policy outlines specifically what constitutes fraud and explains what the consequences will be, e.g., perpetrators will be prosecuted and, of course, terminated, and the company will seek restitution. It should include what activities are considered inappropriate and provide examples of fraud, such as misappropriation of checks, paying personal bills with company funds or using company property without permission. Ideally, it should be disseminated to outside vendors and customers in light of the increase in collusion cases that involve people outside the companies. That makes outsiders aware of the company’s firm position on fraud and may lead to alerts from them about the occurrence of internal fraud.
Is it costly to implement an effective fraud policy?
No, and it’s money well spent. Some of the anti-fraud recommendations have a dollar tag associated with them. Others do not, since they are nothing more than changes to policies that are already in place. Setting up a ‘whistle-blower’ program or a hot line is relatively inexpensive. There might be fees associated with steps like changing where customer deposits are sent. It might be advisable for small business owners to have their companies’ bank statements sent to their houses. That way, they can personally monitor every check or wire transfer to make sure it is appropriate. About 85 percent of all fraud that occurs is done through checkbooks and cash. So, simple mechanisms like reconciling every bank statement or setting up a physical lockbox for cash can deter fraud.
Overall, the costs associated with instituting an effective fraud policy depend on how inclusive a company wishes to make it.
FRANK SUPONCIC, CPA, CFE, CFF, is a principal with Skoda Minotti. Reach him at [email protected] or (440) 449-6800.