FRAUD IN THE WORKPLACE
by: Cary Christian
Most people are painfully aware that the likelihood of falling victim to
fraud is much greater now than ever before. In large part, the Internet has
become a major tool for those who seek to commit fraud. But the vast
majority of business fraud still occurs offline and is carried out by
employees of the defrauded business.
As a small business owner you may not worry much about internal fraud.
Generally, small businesses are not as susceptible to fraud as large
businesses are because the owners are better able to monitor and control the
business without delegating sensitive responsibilities. But that does not
mean that fraud cannot and does not occur. It does. And as your business
grows, the opportunities for fraud will increase dramatically. In fact, the
single greatest factor in someone deciding to commit business fraud is
ORGANIZATIONAL OPPORTUNITY. If your business provides the opportunity,
someday someone will take advantage of it.
For example, if the same person in your organization handles the billing,
the posting of cash receipts, write-offs, and makes all bank deposits,
what's to prevent them from someday making off with some of your hard earned
cash and using their position to cover it up? You've given them the
opportunity. If they ever find themselves strapped for cash, even the most
moral employee might be tempted.
It is far easier to prevent fraud than it is to detect fraud after it has
been committed. Establishing an effective fraud prevention program requires
thought and sustained effort, but the steps to implementation are relatively
simple. Let's look at a few things you can do.
1. Always enforce vacation time. Most employees who commit fraud put
themselves in a position where they must remain on the job continuously to
cover up fraudulent activities. Just knowing they must take vacation every
year is a deterrent because it increases the risk of getting caught.
2. Properly assign authority and responsibility for business functions.
Like the example above, do not give a single employee control over all the
functions required to cover up fraudulent activities.
3. Utilize job rotation. If an employee must periodically rotate out
to another job function, he or she will realize the risk of discovery is
much higher. Like enforced vacations, this can be a powerful deterrent.
4. Utilize surprise audits. Even if you do not have internal
auditors, have your accountants come in periodically and audit specific
functions of your business where fraud opportunities are most likely to
occur. The purpose of these surprise audits is not necessarily to uncover
fraud, but to let employees know that it is likely to be uncovered if
5. Effectively communicate your company's policies on fraud. Make
sure every employee is aware of what activities constitute fraud, what the
punishments will be and the tools you are using to combat fraud. Let them
know that enforced vacation time, job rotation, etc. are designed to deter
fraud. When employees know you are proactively seeking to detect fraud, the
communication itself becomes a deterrent. Increase the perception that fraud
will be detected. Also, be aware that it can sometimes be difficult to fire
an employee, even when you have uncovered fraudulent activities, if you have
not appropriately communicated your policies and what constitutes
6. Establish economic incentives for voluntary compliance with your fraud
prevention program. Make it worthwhile for your employees to join the
fight. Set up formal procedures for employees to use to report fraud. Set up
a reward structure.
7. Minimize employee pressures by instituting employee assistance
programs. Many times fraud is committed by employees who are undergoing
severe hardships and have nowhere to turn for help. If you cannot afford a
formal employee assistance program, at least have an open door policy where
employees feel they can come to management for help when they really need
8. You must be willing to punish fraud when it is found, no matter how
small. Of course, the punishment should fit the crime. Remember that
somebody fudging their expense report might seem to be a minor issue, but it
might be fudging an expense report today and absconding with thousands of
dollars in skimmed receivables tomorrow. Once an employee learns small
frauds are possible, larger ones are just over the horizon. You can use
suspensions, demotions, salary cuts, probation, dismissals and referral for
prosecution for differing levels of seriousness of the violation. If you are
not willing to punish when fraud is found, your fraud prevention program
will be useless.
Remember also that you must ensure your employees do not commit fraud in any
way for the BENEFIT of your company. For example, your controller
decides to commit tax fraud so the company can keep more of its cash. Your
company is responsible for every act of its employees, whether it is aware
of those acts or not and regardless of whether the company participates in
the activity. And that means YOU as the small business owner are
directly in the line of fire. So make sure your fraud prevention program
covers outward-looking activities as well as internal activities.
Copyright (c) 2003