Protect against employee fraud

On June 3rd, 2011, posted in: Accounting by 0 Comment

Here is a great article about how employers can protect themselves from employee fraud. This article originally appeared in the Arizona Association of CPAs magazine and is republished with permission of the author, Robert Minniti.

The Association of Certified Fraud Examiners (ACFE) reported in its 2010 Report to the nation on Occupational Fraud & Abuse that, on average, an occupational fraud is perpetrated for 24 months before being discovered. Further, the median loss due to occupational fraud for private companies was $231,000 in 2009. They also noted that smaller organizations of less than 100 employees are the most frequently victimized and suffered the highest median losses from fraud. The report indicated that the five most frequently perpetrated fraud schemes discovered at small businesses are: billing schemes, check tampering, corruption, skimming and expense reimbursement fraud.

In another study, Occupational Fraud: A Study of the Impact of an Economic Recession, the Association of Certified Fraud Examiners reported that over 55 percent of organizations had seen an increase in employee fraud and 48 percent had seen an increase in the amount of losses due to fraud since the start of the current recession.

The report further stated that employees pose the biggest risk of fraud to an organization and, with the current economic conditions, employees are under more pressure to commit fraud and, due to layoffs, reduced hours, pay cuts, furloughs and benefit reductions, it is easier for employees to rationalize the decision to defraud their employer.

A generally accepted concept for the occupational fraud is the Fraud Triangle, which indicates that three conditions must be present for an employee to commit fraud against their employer. First, the employee must have some form of economic pressure on them that requires a need for more money than they currently have. This could be the result of medical bills, a home in foreclosure, past due loans, drug addiction or gambling problems. Because of the current economic recession, the pressures on employees are extremely high. The second thing necessary for fraud to occur is rationalization. The employee needs to be able to rationalize that their behavior is necessary or they have no choice but to commit the fraud. The final condition is opportunity. The employee must have the ability and opportunity to commit the fraud.

Although firms can do nothing to affect the pressures placed on an employee, and little to affect an employee’s ability to rationalize their behavior, employers do have the ability to control the employee’s opportunity to commit fraud. This can be accomplished by having good internal controls that are enforced and frequently monitored.

The Association of Certified Fraud Examiners study shows that some of the best internal controls for reducing occupational fraud are: appropriate segregation of duties, surprise audits, fraud training for managers and employees, job rotation and mandatory vacations, a fraud hotline, employee support programs, internal audits, a written anti-fraud policy and a written code of conduct.


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