Experts estimate that employee fraud can happen in any company and can reduce annual revenues by 3 to 5%? Employee fraud includes fraudulent financial reporting, fictitious or ghost vendors and employees, bribes, kickbacks, credit card and check fraud, and theft. It usually occurs over a long period of time and is exposed by a whistleblower or by accident. The most expensive fraud is committed by upper level executives and when two or more employees collude to commit fraud. The more access to information and assets, the more expensive the internal fraud.
What can you do to add some or all of that 3 to 5% back to your annual revenue? You can begin by involving everyone from the top down to create a positive culture of high ethics and integrity along with an anti-fraud program and implement some or all of the following suggestions.
Executive teams can be created to work in a nonjudgmental confidential environment to manage risk at the strategic level where issues like stability and disruption are considered before change is implemented. These teams can assess current internal controls, create and implement improvements for fraud prevention and detection and then follow up to monitor and ensure effectiveness and compliance with controls. They can foster high professional ethics and integrity and set standards for accountability and consequences.
Anti-fraud internal controls should deter, prevent and detect fraud and theft. They should be automated and built into processes, effective and create employee awareness and perception of detection. When creating or improving internal controls, it makes sense to involve employees who do the jobs and know the weaknesses in the system.
Important areas for internal controls include the revenue cycle, purchasing cycle, payroll, inventory, cash and investments. Some processes can be viewed together such as cash receipts and disbursements, accounts receivable and sales, inventory and cost of sales, accounts payable and purchasing. Segmenting transactions has been proven effective. For example, if you begin with an approved vendor list and then segment requisitioning, approvals, ordering, preparing the check and signing the check you significantly decrease the risk of bribes, kickbacks, fictitious vendors, vague purchase orders, improper documentation, and out of sequence purchase orders and checks.
Corporate policies can include mandatory taking Paid Time Off and periodic job rotation. Fraud may be deterred when a perpetrator knows the substitute during mandatory PTO and random job rotations is likely to detect the fraud.
Controls can be built into technology to restrict, monitor and alert unusual activity. Each employee should have their own secret passwords and controls can restrict access to only necessary financial or confidential information, restrict access on personal devices and can automatically sign off when the device is not in use.
Some red flags to look for include unreconciled bank accounts, significant accounting adjustments, incorrect postings, no original supporting documentation, customer complaints, excessive voids or credits, irregularities in the bidding processes, irregularities with checks (missing, out of sequence, “cash” payee, rubber-stamped signatures), unusual expenses or low revenue, unfamiliar vendors/employees who may be fictitious, purchase orders/invoices/inventory transfers/shipment documents with poor descriptions or not numbered consecutively, expensive equipment not stored properly in locked cabinets, inventory that is not compared to control accounts.
Executives, managers and supervisors should be actively engaged by observing and listening to their direct reports for behavior and attitude changes. Often perpetrators feel dissatisfied, unfairly treated or pressured financially, work unusual hours when others cannot monitor activity, refuse to take any PTO, have concentrated authority and no internal controls, take confidential information home, unexplained changes to start and quitting times, poor delegation, unmet goals, override internal controls, and perform functions beneath their levels such as clerical.
Monitoring and manual evaluations, performed by person(s) outside of the department, can determine if anti-fraud controls are effective or if they need to be adjusted and act as a strong deterrent.
Another best practice is a proactive, comprehensive Anti-Fraud Program that includes frequent training and education, confidential reporting, rewards, accountability and consequences. The most important whistle-blowers are employees, vendors and customers. Education can be specifically tailored for the department and position. Everyone should be encouraged to report even suspicions and all tips should be investigated to demonstrate the company takes all tips seriously. The investigation team can include an external fraud examiner, forensic accountant, attorney, human resources, corporate security, and the management team.
The corporate anti-fraud program and internal controls must be consistently reinforced from the top down through formal performance evaluations with clear accountabilities and consequences to reward positive outcomes and correct negative results.