Measures for preventing fraud in the workplace

By Greg Papineau | June 22, 2007

BiggsKofford P.C.
In its 2006 “Report to the Nation on Occupational Fraud & Abuse,” the ACFE estimated that
U.S. companies lose 5 percent of their annual revenue to fraud.

What is fraud?
The term “occupational fraud” may be defined as: “The use of one’s occupation for personal
enrichment through the deliberate misuse or misapplication of the employing organization’s
resources or assets.”
To adequately prevent and detect fraud in your company, there must be an understanding
about what the basic elements of fraud are and why people commit it. For a situation or ac-
tion to be fraudulent, there must be a representation about a material fact that is false or mis-
leading and made intentionally, knowingly or recklessly, that is believed and acted upon by
the victim to the victim’s damage.
Even though the definition of fraud is easy to understand, understanding the reasons why em-
ployees participate in fraud is not easy. To better understand the root causes of fraud, many
fraud investigators turn to what is commonly called the Fraud Triangle.

The Fraud Triangle theorizes that people commit fraud because they:
• Face a personal pressure

• Perceive an opportunity to relieve that pressure without getting caught

• Can rationalize or justify their fraudulent activities

It is important to note that the area where an organization can do the most fraud prevention is
in the sphere of opportunity. This area is where good internal controls and leadership with in-
tegrity will provide an organization with the most benefits.
If you’re the owner of a small business, you might think that you’re immune from fraud and
that fraud only occurs in larger companies. Small businesses, defined as companies with few-
er than 100 employees, suffer a much larger number of fraud cases according the ACFE. The
average losses for fraud cases at small businesses is $190,000, exceeding the average loss in
any other group, and were the most heavily represented group at 36 percent in a study per-
formed by the ACFE.
Fraud warning signs
Business owners want to believe that honest and ethical people have been hired and are work-
ing for them. However, this is not true in some circumstances. Many times fraud is being per-
petrated by your most loyal and trustworthy employee. Here are some of the classic warning
signs that exist that you should not take too lightly:
Big spenders: Employees who seem to be living and spending outside of their means prob-
ably are. This is a classic example and one that you should not overlook.
People with financial problems: Just like big spenders, people with financial problems may
be more motivated to commit occupational fraud.
Rule breakers: People who ignore company rules and regulations set a bad example and can
trigger fraud throughout the company.
Weak internal controls and an absent owner: If employees feel they can get away with steal-
ing and there is not a system of oversight, you are susceptible to fraud.
Employees who don’t take vacations: Many times that hard working employee that is always
at the office, the first to arrive and the last one to go home, does not want anyone to find out
their mistakes. This can be a sign of more than just being a workaholic.

How to prevent fraud

So, what can you do? Discovering fraud in your workplace can be very difficult. The ACFE
found that the average length of a fraud scheme is generally 18 months from the time the
fraud began until it was found. Preventing and detecting fraud can be accomplished by imple-
menting the following:
Tone at the top — Create and maintain a culture of honesty and high ethics in your work-
place. Set the “tone at the top” by setting achievable goals and expressing “zero tolerance”
for unethical behavior.
Training — Train employees regularly abut company’s values and code of conduct and how
to recognize and report illegal conduct.
Have a strong system of internal controls — Identify ways to increase security in your com-
puter, record keeping and payment systems.
Pay attention to warning signs on the books — Create internal mechanisms that alert you to
potential transgressions. This can be accomplished with trend analysis and development of
key performance indicators.
Report irregularities — Create a system for employees to anonymously report illegal or un-
ethical actions they have witnessed or suspect.
Fraud prevention is a key component to running a good business and is well worth investing
in. Fraud has a direct impact on your company’s bottom line and it also threatens your hard-
earned reputation.