Preventing and Deterring Fraud in Your Organization

Diane L. Friar, CPA/ABV

Fraud can significantly affect your organization or company’s value, reputation and ability to continue operations. It can range from employee theft and unproductive behavior to misappropriation of assets and deceptive financial reporting. Detecting fraud can be difficult due to document falsification or collusion between management, staff and/or outside parties. However, by combining prevention, deterrence and detection procedures, you can reduce the risk of fraud in your company or organization.

It is important to reduce the opportunity for fraud, and to convince individuals that punishment will occur if fraud is detected. Taking preventative measures to deter fraud can be much less costly in time and expense than investigating fraud after the fact. By maintaining fraud controls, you can enhance and maintain a reputable and positive community position, save monies, avert lawsuits, and create a positive workplace environment.

Management has the responsibility to reduce the possibility of fraud. It is important for the management group to behave honestly and communicate ethical behavior expectations throughout the organization. When the proper example is set, honesty is reinforced. Clear guidance about permitted and prohibited behaviors and clarity that all employees will be held accountable to perform within the organization’s code of conduct provide effective ways to reduce wrongdoing. It may also enhance the ability to recruit and retain high quality employees. Make integrity a requirement!

There are indications that dishonesty occurs less frequently when employees have positive feelings about their workplace environment. Poor employee morale affects an employee’s attitude about committing fraud against the organization. The following factors may increase fraud and definitely detract from a positive work environment:

• Management does not appear to reward or participate in appropriate behavior
• Unreasonable budget expectations or other financial targets
• Lack of recognition for job performance
• Seeming inequities in the organization
• Inadequate training and poor promotion opportunities
• Poor communication methods
• Obvious examples of expense report falsification (even in minimal amounts)

Factors that work toward creating a positive employment environment and reducing the risk of fraud are:

• Reward and recognition systems in tandem with goals and results
• Equal employment opportunities
• Policies that encourage team and collaborative decisions
• Well administered training programs and an emphasis on career development

Consider requiring an annual employee confirmation of responsibilities. All management, financial staff, sales, marketing, procurement and other employees that might be exposed to unethical behavior should be required to sign a code of conduct statement at least annually. This statement should clearly articulate that all employees will be held accountable to act ethically and honestly. This confirmation may also include a statement that the employee is not aware of any violations of the conduct code other than those listed in the response. Inherent in this conduct code should be the encouragement that reports to management regarding potential violations will be kept anonymous and can definitely be made without fear of retribution.

Fraudulent financial reporting and misappropriation of assets cannot occur without a perceived opportunity to commit and conceal the act. To be proactive in reducing such opportunities, identify fraud risks, take step to mitigate those identified risks, and implement appropriate, preventive internal control measures. Obviously, the organization’s size impacts the systems of internal controls. However, smaller entities may find certain control activities are not relevant because of the owner involvement. Regardless, every organization must make it unambiguous to all employees that unethical or dishonest behavior will not be tolerated.

Diane L. Friar, CPA/ABV has been associated with Echelbarger, Himebaugh, Tamm & Co., P.C. (EHTC) since 1977 and is currently a Shareholder and Vice-President of the corporation. She is active in the litigation support and business valuation department as well as client and human resource consulting.  She can be reached at 616.575.3482 or dianef@ehtc.com.