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 firstname.lastname@example.org.