Employee Fraud

Employee fraud costs businesses billions of dollars every year.  According to a 2008 report by the Association of Certified Fraud Examiners (ACFE), 994 billion dollars is lost every year to employee fraud.  This equates to businesses losing 2.7 billion dollars every day.

Fraud Definition: “deceit, trickery, sharp practice or breach of confidence, perpetrated for profit or to gain, unfair or dishonest advantage.  A person who makes deceitful pretenses, sham, poseur.”

Fraud is typically triggered by what is called the fraud triangle. The fraud triangle is financial pressure, a rationalization for the act and the opportunity to commit fraud. The current economic environment creates desperate situations for people and it is an organization’s responsibility to have systems in place to protect both the organization as well as the employee. A good employee put in an uncontrolled environment might do things they would not ordinarily do because of external pressures.

Did you know:

• Most fraud cases are in manufacturing, banking and insurance;
• The median loss is $175,000;
• A large number of fraud cases are never reported;
• It is the first offense for most offenders;
• Fraud is most often committed by upper management and accounting employees;
• Only 7% of those caught have a history of theft;
• Most fraud starts small, develops and grows over time;
• Since most are first time offenders, background checks don’t reveal them;
• Almost half of incidents involve more than one person;
• Fraud is most common in organizations with less than 100 employees;
• It usually takes about 18 months to catch someone stealing;

What should you watch for:

• Behavioral changes;
• Obvious use of drugs or alcohol;
• Someone living beyond their financial means;
• An employee who doesn’t take time off;
• Financial pressures at home;

Ways to protect your organization:

• Create a written fraud policy including:
• Definition of what fraud is
• Zero tolerance
• How an investigation would be done
• Consequences – immediate termination
• Outcome – prosecution
• Training on policy for employees and managers
• Good internal controls
• Monitoring of control processes
• Have investigation procedures in place
• Have more than one person paying bills and looking at bank statements
• Have a user-friendly, tip hotline
• Enforce mandatory vacations
• Use a safe for cash
• Review internal control processes

Conduct an internal audit and ask the following questions:

• Who has access to accounting system?
• How are they supervised?
• Is there more than one person involved in all accounting processes?
• Are all supplies accounted for?
• Is there a process to recognize supply shrinkage?
• Does the company owner review monthly bank statements?

Finally, it is the responsibility of senior leadership to ensure the organization is protected against fraud.  Having good internal controls and consistent auditing processes can help to eliminate the opportunity of fraud within your organization.

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