Employee Fraud: Why enhancing the perception of detection matters
First, the good news. The vast majority of your employees have no intention of stealing from your organisation. The bad news? As you read this, there is likely a good chance that one of your employees is committing fraud, or at least considering doing so. Employee fraud, also known as occupational fraud, happens with alarming regularity. According to the Association of Certified Fraud Examiners (ACFE), organisations lose 5 per cent of their annual revenue to fraud. In Asia Pacific, ACFE estimates that the median loss associated with occupational fraud is $245,000.
Worse still, ACFE reports that it takes businesses about 18 months to uncover such activity. In a recent case in Singapore a rogue payroll manager stole $1.03 million from her employer and the fraud was only detected when she resigned and the new payroll manager could not reconcile the differences. Payroll fraud can be easily perpetrated when one person is in charge of initiating, entering and confirming payroll data.
What drives employee fraud?
You probably struggle to envision what would drive an employee to steal. The ACFE notes how Donald Cressey, a criminologist, determined that when an employee faces some form of pressure, such as money problems, as well as the opportunity to commit fraud and the ability to rationalise that they’ve committed a criminal act, fraud can happen. Armed with this information, what can your organisation do to stop occupational fraud?
Raising the “Perception of Detection”
One of the most effective ways to combat employee fraud involves raising the “perception of detection” — that is the belief that if they commit fraud, their criminal activity will be quickly uncovered as you have robust monitoring and protection in place. This is the same reason why having clearly visible security cameras or an alarm system on the outside of homes is said to deter burglars.
So how do you do this? Here’s some of the ways that your business can raise the perception of detection as well as improve its ability to uncover fraud before the losses have a chance to mushroom.
1. Communicate expectations with a fraud policy
The vast majority of employees know that committing fraud is a criminal act. However, it doesn’t hurt your organisation’s efforts to stamp out employee fraud to spell out exactly what constitutes fraud, and the ramifications for an employee who steals.
2. Remove temptation by thinking like a fraudster
While most employees will avoid the temptation to steal, if you can envision how to commit fraud, so can employees. Take the time to analyse fraud losses involving other organisations mentioned in the press. What went wrong? Does your organisation have the same control weaknesses?
3. Use risk assessments to shore up your defences
Conduct frequent risk assessments of your organisation to identify the potential for fraud and the effectiveness of internal controls in detecting and preventing it. Ensure that there is an owner for each internal control who is responsible for ensuring its effectiveness.
4. Make it difficult to commit fraud by segregating duties
Fraud thrives in secrecy. If an employee controls more than one element of a critical process such as the receipt and payment of invoices, the potential for fraud increases dramatically. If your organisation cannot assign more than one employee to a process, consider adopting a job rotation program and mandating that employees use their allotted vacation. Businesses often discover fraud when an employee is on vacation or assigned to another department temporarily. Business Process Outsourcing can also provide a way to segregate duties.
5. Keep employees guessing — perform surprise audits
Employees that commit fraud don’t want anyone to stumble across their scheme. Arriving unannounced to conduct a surprise audit of a department or critical process can make it very difficult to conceal incriminating documents associated with a fraud.
6. Be proactive — perform bank reconciliations
Ideally, your organisation should reconcile its bank accounts on a daily basis. Employee fraud often goes undetected because no one knows exactly how much money should be in the organisation’s bank account. In addition to reconciling each account, ensure that bank statements cannot be intercepted, altered or destroyed by employees.
7. Give employees a voice by investing in a Hot Line
If an employee suspects that a co-worker is stealing, they often don’t know where to report their suspicions. An employee hot line, ideally managed by third party, can provide a way for employees to raise their concerns anonymously. Employees might view the hot line negatively, which is why it’s important for finance leaders to position it in a positive light, and as a means of protecting the organisation.
Preventing fraud can be a long process that requires a multi-pronged approach to truly be effective. Employees will likely always face financial pressures of one type or another. They’ll likely always have the opportunity to enrich themselves at your organisation’s expense, and have the ability to justify their actions. Your organisation’s efforts to prevent fraud should leave employees asking one question, “Why commit fraud when they’re bound to catch me?”
Original ADP post — Employee Fraud: Why Enhancing the Perception of Detection Matters