Smart Business asked Lawrence Simon to explain the practical steps that middle-market companies can take to implement fraud deterrence programs and otherwise protect from fraud.
Has public awareness and recent criminal prosecutions deterred fraud?
There is no question that the tougher laws, jail time and improved internal controls have made an immeasurable impact in deterring fraud in our society. However, human instinct will always give in to the temptation to steal or falsify accounting records for personal monetary gain. That’s why it will always be critical to implement specific fraud deterrence programs to safeguard the assets, value and reputation of a company.
What types of pressure points exist for individuals to commit fraud?
Several, for both large and small companies.
Incentive and pressure - We have seen from the fraud committed by the Enrons, WorldComs, and other large public companies that greed for personal gain is a driving factor. For instance, a company may buffer revenues and profits so that key executives or shareholders will benefit from stock or bonus programs or even the continued appreciated value of their company’s publicly traded stock
Opportunity - Poor oversight and weak internal controls can provide plenty of opportunity for an employee to commit fraudulent activities. We find in too many instances that companies have not regularly reviewed their own internal controls, which have provided significant gaps available for an individual to steal assets.
Rationalization - Many fraud perpetrators find no difficulty justifying their fraudulent behavior. For instance, we have seen reasons in employee theft situations justifying their actions with a comment such as, ‘I borrowed the money, and was going to pay it back.’
What are some steps for management to protect their company against fraud?
There are practical steps that all companies can take to prevent and deter fraud from occurring. Recent studies have shown that fraud deterrence programs can reduce or cut fraud losses significantly. For example, The Association of Certified Fraud Examiners 2002 Report to the Nation indicated that ‘the most common method for detecting occupational fraud is by tips from an employee, customer, vendor or anonymous source.’
Measures can be taken to counteract or deter any potential fraudulent activities.
- Management must lead the tone of ethical behavior. Establishing a ‘Code of Ethical Conduct’ will reflect the ethical values of the company. This written code is an excellent way for management to communicate the ethical rules that they must follow, along with all corporate employees.
- Implement a fraud detection program. Specific procedures can place to detect fraudulent activities. These procedures can be performed by an internal audit group or certain designated individuals. Interestingly, these types of audit steps tend to discourage employees from committing fraud because they realize that their acts could be detected.
- Establish an employee and vendor hotline. Establishing a confidential hotline operated by a third party can be the best method of detecting fraud. Over the past several years, it’s been shown that an employee/vendor hotline represents a critical tool that can be anonymously used for reporting suspicious activity. Once reported to the hotline, the tip is extensively investigated to gather all of the supporting evidence for the claim.
- Educate your employees about fraud. It’s extremely critical to provide your employees with the knowledge as to the different types of fraudulent activities, and how they might identify occurrences of fraud in the work place. In addition, the message of ethical behavior should be continuously communicated to your employees through e-mail messages, newsletters, posters and other repetitive methods. Constant communication can be a key element toward enhancing your company’s corporate culture.
LAWRENCE A. SIMON is a Certified Public Accountant and director of Doeren Mayhew, a regional accounting firm in Troy, Mich. Doeren Mayhew provides a wide range of professional services to middle-market companies. Reach Simon at firstname.lastname@example.org or (248) 244-3225.