Business owners want to trust their employees. And many think their employees can do no wrong. But nowadays, many business owners are unfortunately being proven wrong. Workplace fraud is a serious issue that businesses across America are facing.
“Just because a business owner has complete trust in his or her employees — even longtime employees — and believes they’re immune to fraud, doesn’t mean they won’t get burned,” says Brent Ardit, CPA, audit manager at Rea & Associates.
“It’s important to have some level of professional skepticism,” he says. “Don’t cause friction within the organization, but you owe it to the company to have a level of oversight. Trust is definitely not an internal control.”
Smart Business spoke with Ardit about how the risk for workplace fraud drives the need for strong internal controls within a company.
Why would employees commit fraud?
One of the more common reasons an employee would commit fraud is because of financial trouble at home. He or she might think, ‘I’ll just take this little bit of money from my company now. No one will notice, and I promise I’ll return it. I’ll put it back once things get better.’
Several workplace fraud studies have shown that the economic recession the country experienced a few years back has led to a rise in workplace fraud.
How does workplace fraud occur?
Workplace fraud occurs most often when there’s a lack of segregation of duties. One person may be managing the majority of accounting and financial reporting tasks with little to no oversight. This increases the chances for fraud to occur.
What approach should a company take to clamp down on fraud?
First, there needs to be a tone-at-the-top approach. The company’s leadership has to set a good example for employees when it comes to managing the company’s finances.
In addition, business owners should examine the accounting department structure. After review, they may find more oversight is needed. A cost-benefit analysis can determine how to design a company’s internal control structure.
Business leaders may have great ideas for how to combat fraud, but if it’s going to cost the business more than what they would save, it might not be worth doing. The company should weigh all the options on how to reduce fraud. That may mean hiring additional staff to oversee finance functions, or it may mean a company restructures itself with existing staff to ensure that adequate financial oversight is established to deter fraud.
If a business has a single employee solely managing the accounting and finance functions, it should ensure that other employees are cross-trained in the individual’s tasks and responsibilities. Also, the business may want to ask the employee to take a vacation. If an employee refuses to take vacation, it may be a sign that something is amiss.
Is paying more attention to employee work alone a deterrent to fraud?
Regularly reviewing work, rather than waiting until year-end, is beneficial. If employees know that leadership is watching, it provides some level of deterrence. And if the temptation for fraud arises, the employee is inclined to avoid a violation since he or she knows they are being watched. It’s like the Hawthorne effect, which refers to the tendency that people will alter their behavior simply because they are being observed.
Are unannounced audits effective?
Yes, if a company has internal audit procedures, having an unannounced audit could prove effective. If employees know the company is watching and that an internal audit could take place at any time, they’ll probably be less likely to commit workplace fraud.
What’s the outlook for workplace fraud?
It’s critical that companies stay ahead of the issue. New schemes appear every day, and continued oversight and monitoring of reports will help head these off. If a company follows these guidelines, it can keep fraud to a minimum.
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