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Do You Trust Your Employees?

Occupational fraud can cost companies big money, but is preventable

Red Flags

Every fraud case, it seems, has red flags—before, during, or after the incident(s), as perpetrators will, according to Ratley, have to “step outside of normal procedures.” Among these behavioral indicators are employees living beyond their means or having financial difficulties, those with unusually close relationships with a vendor or customer, and workers with control issues or an unwillingness to share duties.

Daniel Draz characterizes these red flags as ‘unusual activity.’ As principal of Fraud Solutions, an investigative consulting firm based in Naperville, a suburb of Chicago, he explains, “Red flags are often industry specific, but there will always be universal [examples] that apply to all businesses.” Suspicious activity can include financial and banking irregularities, missing documentation such as receipts and billing statements, ‘phantom’ invoices, cash disbursements, and inventory discrepancies. On the employee side, Draz confirms that little or no segregation of duties and workers living beyond their means certainly warrants closer attention.

Prudent, Proactive Prevention

Hindsight, as they say, is 20/20. “Preventing a fraud before it happens,” says Draz, “represents a significant cost savings for businesses, as historically speaking, we know with certainty that the longer a fraud goes undetected, the larger the losses become over time. Larger frauds also have other impacts including brand damage, reputational damage, loss of confidence from stockholders and investors, and stock depreciation.”

Draz recommends being proactive, as “putting in the appropriate controls and attempting to mitigate fraud before it occurs is always a more prudent practice then attempting to deal with it after the fact, when the fraud has gone unchecked for long periods of time and the losses have increased exponentially over time.”

Internal Controls

Internal controls are fairly simple, but they must be followed. For example, keeping the record keeping and actual custody of assets separate—this segregation of duties can significantly reduce risk. One person should never have sole authority to initiate, authorize, approve, or complete transactions without someone else signing off on the process. And owners should open bank statements, not employees.

Draz comments: “Key internal controls are always wrapped around places with the most exposure and are usually financial systems such as accounts receivable, accounts payable, and payroll.”

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