Fraud Prevention: Economic Downturn May Elevate Risk

Mark Sobczak, CPA, Auditing & Accounting Shareholder   email | bio
February 2010

Overview

Occupational fraud is defined by the Association of Certified Fraud Examiners as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets." Currently, the frequency and financial impact of occupational fraud are estimated based on a sample of known information. However, each year cases go undocumented because they are not prosecuted by the employing organization and/or organizations do not know they are victims.

Spotting the Fraudster

To adequately discuss fraud prevention, we must first address why people commit fraud. Numerous theories have attempted to address this question over the last century. A common argument is that employees generally do not take a position with the intention to commit fraud. In fact, fraud studies indicate that a low number of perpetrators had convictions prior to committing fraud. So why would a law abiding person do it? The answer lies in the fraud triangle:

• Pressure - Financial "need" that cannot be solved legitimately
• Opportunity - Person identifies a way to solve the financial problem
• Rationalization - Ability of the perpetrator to not see themselves as a criminal

In general, all three factors must be present for fraud to occur. If an employee is having severe financial difficulty or perceives to have been "wronged" by the organization, they may be a greater risk for fraudulent activity. Any steps to remove one of these elements will reduce the likelihood that your organization will be a victim. While pressures and rationalization are personal in nature, organizations can reduce the opportunity to commit fraud with a proper risk assessment and anti-fraud programs.

Anti-Fraud Programs

Delivering a message that unethical behavior will not be tolerated will often reduce an employee's ability to rationalize fraudulent behavior. Every organization should have a written code of conduct that is communicated to all employees. The code of conduct will serve as a guide to employees in their daily decisions. Management should consistently demonstrate an ethical and caring tone to serve as a foundation for reducing the opportunity for employees to commit fraud.

The following are measures primarily aimed at reducing fraud:

• Internal Control Review: Organizations that routinely update their system of internal controls and rotate duties among staff will more likely deter fraudulent behavior.
• External Financial Audits: While external audits are not specifically designed to prevent or detect fraud, auditors review internal controls and must consider fraud in designing their audit procedures.
• Internal Audit Departments/Unpredictable Procedures: For organizations large enough to have an internal audit department, such procedures may reduce the frequency and length of a fraud scheme. For small organizations, consider unpredictable procedures to "audit" a type of transaction or process. For example looking at cash receipts for a period of time, credit card processing, employee expense reports, or cash disbursements that may reduce the opportunity employees have to commit fraud.
• Fraud Hotlines: Organizations that provide an anonymous way for employees to report unethical behavior may see a reducuction in fraud.

What to do About Suspected Fraud

If your organization suspects that fraud has occurred, strongly consider the use of a forensic accountant. This person will use investigative techniques and documentation for the purpose of litigation. A specialist such as this can assist the organization in determining the length of time and financial impact of the fraud.

Occupational fraud is a fundamental issue for all business organizations. Based on published statistics, it is a problem that is growing in frequency and severity. Fraud prevention starts by management setting an ethical tone and is supplemented by effective anti-fraud programs aimed at reducing the opportunity for employees to commit fraud.

If you have any questions, or would like further information on how to prevent fraud, please contact Mark Sobczak (262/754-9400, ext. 234).