Fraud Detection and Prevention
Fraud may be committed by senior executives, managers, and employees, and each of these three groups is about equally likely to do so. The higher up on the scale, the longer it takes to detect the fraud.
Why embezzlement occurs:
- Opportunity–a person who has been with the company a long time may not be supervised closely; and therefore, may have more opportunities to commit fraud.
- Rationalization–someone feels he or she is not being compensated appropriately, or has been passed over unfairly for a promotion.
- Pressure–financial pressure or the pressure to lead a life style that can’t be supported by current income. Personnel nearing retirement may have financial pressure if they are concerned about having enough assets to provide for their retirement.
- Arrogance–the more arrogant an executive, manager, or employee, the more likely he or she will commit fraud.
- Competence–highly skilled people are better able to commit fraud.
How fraud is detected and prevented:
- Most fraud is detected by tips from other employees, sometimes via a hotline. Employees may be more likely than management to be aware of unusual behavior that that may indicate another employee is involved in fraudulent activity.
- Management attitudes and systems can demonstrate that management is alert to the possibility of fraud. For example, management may reconcile bank statements and question employees about non-reconciled items. Employees who are aware that management is alert to possible fraudulent activity are less likely to commit fraud.
- Customers may report possible fraudulent activities. For example, not receiving a receipt for a payment may create suspicion of fraudulent activity. Customers can be invited to participate in the hotline mentioned above.
- Hotline–an external hotline may work best as it can be monitored continually
- Internal controls
- Segregation of duties
- Management reviews–e.g., investigating red flags, verifying the legitimacy of vendors
- Surprise audits can serve to demonstrate to employees that they commit fraud at great risk of being detected
- Employee support programs, e.g., assistance with financial planning, guidance in drug abuse problems
- Requiring annual vacations
- Regular rotation of job functions
- Develop a code of conduct and require all personnel to sign it annually. It will set forth the ethical behavior required of all personnel and describe the fraudulent activity. It can be helpful in a court of law when trying to recover fraud losses. (most fraud losses are never recovered, due to some extent to the difficulty in getting government officials to agree to prosecute)
- Be aware of publicized frauds in other companies and try to determine how the circumstances in your company can lead to a similar occurrence.