Fraud happens in businesses of all types, sizes, and levels. It can occur at any level of an organization; fraud frequently occurs at the management level or above. Every fraud situation will have each of the following three elements present: motive, rationalization and opportunity. These three elements are known as the fraud triangle.

The first type of fraud is asset misappropriation.  Asset misappropriation is described as the theft of company assets by an employee. Next, corruption happens when employees use their influence in business transactions for their benefit while violating their duty to the employer. Examples of corruption are bribery, extortion and conflict of interest. Finally, financial statement fraud is schemes that involve omitting or intentionally misstating information in the company’s financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.

Know Your Employees

Observing and listening to employees can help identify potential fraud risk. Often, an attitude change is a clue that can indicate risk. This can also reveal internal issues that need to be addressed. For example, a long-term employee that has an increased workload and feels underappreciated has the potential to commit fraudulent activity. Open and frequent dialogue with employees is a good way to maintain a clear perspective on employee morale.

Set Up a Reporting System

Everyone within your organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them.  Most work-related fraud is detected because of a tip from an employee.  Set up a system where employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline. Protecting your employees’ privacy will promote engagement with the policy reassuring employees concerns about retaliation.

Implement Internal Controls

Implementing internal controls will help safeguard your organization’s assets, ensure the integrity of its accounting records and deter and detect fraud and theft. Internal control programs should be monitored and revised consistently to ensure they are effective and current with technological and other advances. Educating all employees on the signs of fraud is a good practice to deter any activity.

Fraud is present in today’s business world and many companies are concerned with the possibility of it occurring within their organization. No matter how well you run your business or how well you may know and trust your employees, no organization is not susceptible to fraud. Occupational fraud can result in substantial financial loss, legal costs and ruined reputations that can ultimately lead to the downfall of an organization. Establishing an internal system for reporting suspicious activity can help decrease the risk and potential losses.

References: SB Online, CG Team