Fraud is something that can potentially impact every organization, from businesses to charities to churches and much more. It’s a serious crime that happens more often than you may think.
There are many different types of fraud that an organization can face. One example is payroll or accounts payable fraud, where an employee makes fraudulent payments to a fake company or employee and keeps the money for themselves.
Another is bribery, in which a person is forced to pay money in order to prevent a threat from becoming reality. And a third common but complex type of fraud is financial statement fraud. That’s when company leaders misreport finances to gain a financial incentive, like a higher stock price or increased bonuses.
Fraud can lead to serious penalties, including fines, service, and even prison time. The more costly and complex the fraud is, the stiffer the sentence. There are many people in prison right now for serious fraud crimes. This site can give you a sampling of some fraud inmates.
The good news is there are steps your organization can take to protect yourself. Below are some fraud prevention steps to consider:
Document your processes.
Often fraud occurs because there are gaps in processes. There’s a step where payments aren’t tracked or potentially where financial statements aren’t reconciled. A savvy employee can recognize these gaps and take advantage of them.
For example, perhaps the accounts payable person is the only one who checks the statements and reconciles the accounts. He or she would then know that they could write checks to fictitious vendors and never get caught. That creates a gap that can be exploited.
Document your processes and look for areas that are lacking in oversight. Then take steps to eliminate the gap and strengthen your procedures.
Have multiple eyes on everything.
Generally speaking, it’s a bad idea to trust one person to handle any financial process. If that one person knows they have full authority and responsibility, it can be too tempting to take advantage.
A good practice is to have at least two people double-check each other’s work. This creates a natural obstacle for fraud. Someone is less likely to take advantage if they know that someone else will see what is happening.
Regularly audit your books.
Have a regularly scheduled audit every year with an outside firm. Put this on the schedule well in advance and make it known that the audit is happening.
This accomplishes two things. One is that the audit will uncover any wrongdoing. However, it also acts as a deterrent. If an employee knows that an audit is happening, they know that anything they do will be reviewed. Most people who commit fraud are intelligent people. Thus, they’re not going to take a stupid risk by committing fraud right before an audit.
Conduct background and credit checks.
If you’re going to hire someone for a key position where they will have financial responsibility, do a check on their background and even their credit. Obviously, if the background check brings up a past conviction, that should be an automatic red flag.
However, even if they don’t have a criminal past but they do have credit issues, you may want to think twice about making the hire. Financial troubles can make people do things they normally wouldn’t. If they’re desperate, they could make bad decisions. Even good people can commit fraud if they have no other options.
Be active and around.
Another simple but common cause of fraud is simply a lack of presence by leadership. Even at a most basic level, it’s easy to take money out of the cash register if the boss is never around.
If you’re active and involved in the business, it limits opportunities for employees to take advantage of you. This is true for other business leaders as well. Trust your employees, but don’t give them blind faith. You may be giving them an opportunity to commit fraud.
Conduct annual reviews. Spot-check employees’ work. Ask questions about payments and transactions. The more involved you are, the less confident they may be in cutting corners and taking money.
Fraud is a serious crime that can cripple an organization. However, most fraud can be prevented with some simple steps. Take action today to tighten up your processes and improve communication. That will dramatically reduce your risk of being a victim of fraud. With some simple action you can protect yourself and your business.