Employee fraud is among the costliest threats faced by employers. While estimates regarding losses vary widely, fraudulent activities can go undetected for an average of 12 months and generate a median loss of $117,000, according to the most recent report of the Association of Certified Fraud Examiners (ACFE).
To fight fraud, your organization will need the ability to spot potential schemes and the knowledge to implement practical steps that will make it harder to commit. Here’s some guidance to help you evaluate the threats and take steps to mitigate the risks.
Evaluating the threat
The ACFE defines employee fraud as “using one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”
According to established criminal theory, employee fraud happens when a staff member has an undisclosed financial need (such as a gambling addiction), perceived opportunity to commit fraud (such as knowledge of weak internal controls in the workplace) and the ability to rationalize their actions (for example, “it’s a victimless crime”).
Three of the most pervasive types of employee fraud are:
1. Corruption. Here, a dishonest employee misuses influence over a business transaction to gain a direct or indirect personal benefit. Typical transgressions include bribery, illegal gratuities and economic extortion.
2. Asset misappropriation. In these cases, an employee abuses an employer’s trust to steal assets. Common schemes include cash skimming, check tampering, false voids, refunds and inventory theft.
3. Financial statement fraud. This involves an employee deliberately misrepresenting an employer’s financial condition by intentionally misstating or omitting amounts or disclosures to deceive users of financial statements or other financial reports.
Mitigating the risk
Each form of fraud can exact substantial losses and take years for an employer to recover from. In extreme cases, fraudulent schemes can shut down operations completely. The good news is it’s entirely possible to set up safeguards that help deter fraud as well as mechanisms that will raise red flags if schemes do occur. These include:
Conducting a risk assessment. Employees who commit fraud exploit vulnerabilities. A risk assessment evaluates your organization from top to bottom to identify the specific types of threats you face and the effectiveness of your current defenses.
Increasing the “perception of detection.” If dishonest employees believe that fraudulent activities will be uncovered quickly, they’ll be less likely to even try. Communicating the existence and effectiveness of internal controls, conducting frequent spot checks and audits, and having multiple “eyes on the problem” can increase the perception of detection.
Opening a fraud hotline. Most fraud schemes start small and grow over time. Establishing an anonymous reporting method for employees, vendors, customers and even the public at large will increase the chances that you’ll catch fraud before it inflicts substantial losses. This can involve an online portal or phone hotline.
Remaining vigilant
Most employees will never engage in fraudulent activity. Unfortunately, there are some who might want to give it a try. Remaining vigilant and investing in a robust fraud prevention program can help ensure they fail. Contact us for help evaluating your internal controls and devising actionable strategies to reduce risks.