Preventing Employee Fraud

It’s sad but true that fraud in general is on the rise. There’s an inverse relationship between the economy and employee fraud; as our economy declines employee theft increases. It’s also a sad but true fact that our society, in general, is more accepting of individuals who “beat the system.” Fraud has permeated virtually every area of our lives. Fraud has become so commonplace it’s accepted by many as the status quo. Think about it: We have tax fraud, insurance fraud, mail fraud, wire fraud and bank fraud,  not to mention bid rigging, bribes, political malfeasance, investment fraud, mortgage fraud and identity theft.
Personal attributes such as honor, pride, ethics and moral values have been replaced by greed, irresponsibility, laziness and a “what about me?” attitude. Many feel they are owed a certain standard of living and don’t understand the concept of earning anything. It’s up to you, the business owner, to create an environment of perceived certainty of detection. Let the thieves know that there’s a better-than-good chance they’ll be caught. Gone are the days where honesty, integrity and trustworthiness were the norm, where stealing would involve losing the respect of one’s peers. Therefore the corporate culture in which your organization operates is critical. 

What’s the corporate culture in your organization?

How do you treat your customers, your employees, your vendors?

Are efficiency, integrity, and honesty the norm or the exception to the rule?

Your attitude, and that of your top managers, toward controls, transparency, and the environment in which your employees work, is a crucial piece of your anti-fraud program. Perhaps a culture change is needed within your organization. Do you need to get your processes systematized and adopt a formal code of conduct? These two items will create a more controlled environment encouraging compliance. (A sample code of business ethics and conduct is provided for you in the appendix to this book).
It’s your responsibility to set this tone for your organization. Your employees will follow your example for good or for bad. A few efficient, competent employees, working in a supportive environment, can perform at high levels with few internal controls. In contrast, just one incompetent, dishonest employee will reduce even the most organized of processes to a shambles. You can help ensure effective controls are in place by creating an appropriate working environment and hiring competent, trustworthy personnel. 
Because your personnel are so important, the methods you use to hire, evaluate, train, promote, and compensate your staff become an important part of your internal control system. If your employees are competent and trustworthy, reliable financial information will result even with other controls being absent. Remember, though, people have their shortcomings. They may encounter personal problems, become bored or dissatisfied with their job, or have goal changes that disrupt their performance at work. This leads us into the third and final rule you must follow.
You mustn’t place too much trust in key employees. It’s not beneficial for them or for you. A trusted employee works with little or no oversight or control checks in place. Deception is the linchpin to fraud. In order for me to deceive you, you must first trust me. Managers and bookkeepers trick their employers out of billions every year. Trust your managers and bookkeepers but let them know their work will be verified. Even the most committed, key, influential people in your company (even your partners) need to know there are checks and balances in place to keep everyone honest and financial reporting transparent.