Enhance Your Corporate Fraud Defense

As companies globally continue to slog through a challenging economy, they’re also fighting the specter of fraud. Here’s an eye-opening stat: A typical organization loses an estimated 5% of its revenue to fraud annually, resulting in total losses of more than $3.5 trillion, according to examiners participating in the Association of Certified Fraud Examiners’ survey of worldwide fraud, 2012 Report to the Nations on Occupational Fraud and Abuse.

Unfortunately, employees can be a natural culprit of fraud because they have the most immediate access to funds and materials. Fortunately, there are steps you can take to reduce the chances of corporate fraud.

1. Honing in on workers. Knowing and empowering employees can decrease instances of fraud. How? First, perform background checks when hiring employees — particularly for financial and management positions. A thorough review can uncover any criminal convictions involving embezzlement, theft, forgery or other fraud.

Second, encourage workers to watch what is going on around them and to alert a supervisor when they believe theft or fraud is being committed. Protect employees who report fraudulent acts by providing a confidential means — such as a toll-free hotline —to express their concerns.

Finally, ensure employee compensation is competitive. Workers who believe they’re underpaid may more easily rationalize committing fraud. Compare your pay rates to others in your industry and ensure that they’re competitive.

2. Turning to professional help. A CPA can be a powerful resource in uncovering fraud and embezzlement. He or she can assist you in creating effective internal controls and help monitor bookkeeping records, invoices, bank statements, payments, journal entries, financial reports and other documents.

Ask an accountant to perform scheduled and unscheduled financial audits. Surprise audits can help identify potentially dangerous gaps in controls and procedures and let your employees know that fraud prevention is a high priority.

Forensic accountants can also be useful. These fraud experts use their accounting, auditing and investigative skills to detect indications of financial fraud. One telltale sign of fraud is growing accounts payable and receivable combined with dropping or stagnant revenues and income. Others may include excess inventory, a large number of account write-offs and increased purchases from new vendors.

A fraud expert will examine your financial statements for these and other dangers as well as assess your company’s culture and business practices to determine what conditions may be causing fraud to thrive.

3. Enforcing a fraud prevention policy. A good line of defense against fraud is a well-written fraud prevention policy. Explain your company’s code of ethics and include specific rules regarding the use of office supplies and company-owned equipment. Your policy should also spell out what constitutes fraud and how you will treat those caught committing it.

Make it clear that employees caught committing serious infractions will be terminated and prosecuted to the full extent of the law. In addition, state that policy violators will have to repay stolen funds or pay for stolen equipment. Finally, require all staff members to sign an agreement stating that they have read and understand your fraud prevention policy.

Fortifying your company against fraud

Fraudulent acts can have damaging financial effects on a company. There’s no way to completely safeguard against fraudsters, but empowering employees to report fraud to management and enforcing a strong fraud prevention policy can significantly reduce the chances of fraud occurring.

Copyright © 2013 Thomson Reuters / BizActions.