Investigating fraud is time-consuming and expensive. There's little choice in the matter for some companies, however. Once a fraud is discovered, it's often necessary to investigate the situation to determine who was involved, how the fraud occurred, how much money was lost, and what evidence supports the allegations of fraud.
Preventing fraud is far less expensive. It reduces the amount of money lost to fraud, and should also reduce the need for fraud investigations. Most companies will recover 25% of less of the funds stolen by employees, so it makes sense to attempt to reduce the amount of fraud in the company.
There are three keys to reducing fraud in companies:
Hire the Right Employees
Bringing on the right employees for your company means two things: One is finding people with the right skills and disposition to do well at the company. The other is finding people with an ethical history. Background checks are easy to do and relatively inexpensive. Important parts of the background check include verification of past employment, contact with references, and criminal and civil court checks.
Create Effective Policies and Procedures
The heart of fraud prevention is in a company’s policies and procedures.Proactive fraud prevention procedures are at the heart of internal controls. While compliance with current regulations is important, having substantive controls that actually prevent fraud is even more important.
For maximum effectiveness, a fraud expert needs to be involved in the development of control procedures. Those experienced with fraud are in the best position to recommend the most valuable controls. Remember that effective controls aren't necessarily expensive to create and implement. There are many inexpensive options.
Studies have found that employees can be the company’s best watchdogs. As you might expect, most employees are generally honest, and they don’t like to see someone else stealing. If management wants employees to help in detecting fraud, they must educate them on what fraud looks like, feels like, and costs.
Most employees haven’t come into contact with fraud on the job, or they just didn’t know that they were in contact with fraud. Provide basic training for all employees to introduce them to the concept of internal fraud, and give them a foundation for on-the-job watchdog duties.
All in all, the cost to implement some basic fraud prevention initiatives in a company can be small, especially when it's compared to the amount of money that could be lost to fraud. The long-term benefits of fraud prevention activities are undeniable, and companies can achieve immediate savings by reducing the risk of fraud.
Tracy L. Coenen, CPA, MBA, CFE performs performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.