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Fraud Prevention: Trust is Not an Internal Control

Alex Helfand, ENCE

Of course you trust your employees. Trust is essential in order for day-to-day operations to properly function. However, even if you feel that you have every reason to completely trust your staff, you still need internal controls. Especially in a difficult economy, if a need exists and the opportunity arises, even the most unlikely perpetrator can become a guilty party.

Why You Need More than Trust

No business owners want to believe their employees will steal. Do you find yourself using any of the following reasons to reassure yourself of your company’s safety?

  • We Did Background Checks Before Hiring. This is an excellent first step, but unfortunately, it’s not sufficient. The 2012 ACFE Report to the Nations shows that almost 90% of occupational fraud perpetrators had never previously been charged or convicted for a fraud-related offense.
  • I Run a Non-Profit or Religious Organization with Strong Values. Yes, setting an ethical tone and/or abiding by a strong corporate value system is essential to preventing fraud. However, places of worship and non-profits are just as vulnerable to fraud as any small business. ACFE’s 2012 Report shows that non-profits and religious organizations experienced median losses of $85,000 due to fraud incidents.
  • My Instincts Will Tell Me if Something is Amiss. Again, the statistics show that this line of thinking is dangerous. The average occupational fraud scheme lasts 18 months – almost two years – before it is detected! Huge financial and data losses can occur in that time frame.

Thousands of small businesses and not-for-profits suffer the financial and emotional consequences of fraud each year because they, too, rely only on trust.

Internal Control Basics
Proper controls – such as segregation of duties and thorough review of transactions and expenses – will make it more difficult for an individual to embezzle company funds. The implementation of surprise audits can also help prevent and detect fraud, as they take away the routine environment that allows employees to identify and manipulate weaknesses in controls.

Another prevention and detection measure is to institute mandatory vacation leave. The employee that never takes vacation may appear dedicated, however, they may actually fear that someone would uncover their graft should their duties be taken over for a short period of time.

Finally, be on the lookout for certain behaviors displayed by your employees. The ACFE’s Report to the Nations also states that in 81% of fraud cases, the perpetrator displayed one or more behavioral warning signs, such as an unusually close relationship with vendors or customers, excessive control issues, living beyond their means, and financial difficulties.

An environment in which employees are trusted, well-liked, and dedicated is important; however, it is vital to not simply rely on your perceptions of employees, as they may be wrong. And, increased trust may mean increased opportunity. Formal internal controls and targeted fraud prevention and detection efforts are important for every organization.

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