6 Steps to Avoid Internal Fraud
Did you know March is Fraud Prevention month? We’re sharing the best steps to implement effective fraud prevention tactics within your organization.
Research shows the average organization loses 5% of revenue to fraud per year, with more than 85% of occupational fraud cases involving employee theft. Ensuring effective fraud prevention measures are in place is much more cost-effective than spending resources at a later time on recovery and investigation.
Arguably the most effective mechanism for preventing fraud is convincing employees that attempts to defraud the company will be quickly detected. When deciding to steal, fraudsters typically do not anticipate being caught. In fact, many fraudsters start out believing that they will only steal once and then put the money back as soon as they can, before anyone notices — although most never do. Consequently, increasing the perception of detection — even more than the threat of sanctions — can effectively deter many tempted employees from engaging in that first fraudulent act.
We’ve included six steps on establishing a work environment that effectively creates a strong work environment while reducing employee risk for engaging in fraudulent activity.
More than 85% of occupational fraud cases involve employee theft.
Implementing Employee Monitoring Systems
Implementing employee monitoring systems is a clear way to send the message that the company is actively seeking out misconduct.
Employee monitoring systems is a very effective way to show that a company actively seeks misconduct, but must be implemented with proper communication. If employees feel scrutinized, it can negatively impact employee culture, however, when openly communicated as a way to comply with legal restrictions, and compliant internet and email monitoring, employees should see this as a non-accusatory measure.
2. The Number of Employees Who Resort to Fraud Is Minimal
Education for your employees on the dangers of fraud through initiatives such as anti-fraud training is absolutely critical. This practice fosters employee engagement in the process while providing support on understanding gray areas that exist within fraud. Education should be implemented to focus on:
what fraud is (and is not)
how unreported fraud hurts the whole organization
red flags to look at
how to report suspicions
3. Formal Reporting Mechanisms
Create a formal reporting mechanism, whether an anonymous form or a different method, that allows individuals to come forward in a way that ensures their anonymity and confidentiality.
4. Creating a strong, ethical culture
Creating a strong culture with an emphasis on ethics is a way to ensure employees truly feel valued and don’t feel the need to resort to fraud. This practice involves open and honest communication with a strong code of conduct that managers actively support.
5. Open Door Policies
Additional practices such as providing assistance, counseling, and other employee options and benefits in times of need are important to establishing trust and openness within organizations.
6. Employee Background Checks
Conducting employee background checks can prevent hiring mistakes that let known thieves in through the front door. However, as most occupational fraudsters are first-time offenders, background checks have limited effectiveness in preventing fraud and should be but one tool in the company’s anti-fraud program. Nonetheless, background checks of new hires and employees up for promotion — as well as routine checks on employees with access to company finances, sensitive information or other valuable resources — underscore a commitment to hiring and retaining only honest and ethical employees.
Routine background checks are essential, both for new hires and existing employees who have access to the company’s sensitive information. Although they have limited effectiveness, background checks are still an important tool in an effective internal fraud-prevention program.