Fraud awareness training is just the beginning.

Timothy Ball, Executive Vice President, The Bonadio Group

December 9, 2021

4 Min Read
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Source: photobyphotoboy via Adobe Stock

Fraud is a major problem that affects all organizations worldwide. I often tell business owners, it's not a matter of if it will happen — it's when. Because fraud frequently goes undetected or unreported, it's hard to determine the full scope of losses to businesses around the globe, but it's more than anyone would like to admit.

The most difficult truth about fraud is that not all of it can be prevented. Even in the most secure organizations, some type of employee fraud is likely to occur, whether as simple as stealing time or as complex as arranging kickbacks on vendor contracts. But organizations can certainly better protect themselves from fraud, and it starts with establishing and maintaining an effective internal fraud protection program.

When businesses start to build or evaluate an internal fraud program, here are four tips to keep in mind.

1. Implement Fraud Awareness Training
One of the best ways to prevent fraud is to build an internal web of fraud detectors. Fraud awareness training equips employees with two key weapons: awareness of what fraud is, and the mechanism to report it. According to the Association of Certified Fraud Examiners' (ACFE) "2020 Report to the Nations," 43% of fraud cases are identified through tips, with half of those tips coming from employees. Creating an environment where your employees not only know the damage that fraud can do to their organization, but also what to do if they suspect it, can create a robust fraud prevention system that has next to zero additional cost. And who pays better attention to the actions of your employees than their co-workers?

Comprehensive fraud awareness training should include basic information to help your employees identify when something isn't right. Training should teach your employees that fraud is not tolerated in your organization and encourage them to act — if they see something, they should say something. Details regarding when, how, and to whom to report should be communicated regularly, as well as the protocols the organization will follow if a tip is received.

2. Create a Hotline
Setting up a fraud hotline is the best way to gather tips and detect schemes. In fact, the ACFE reports that organizations with hotlines detect frauds more quickly than those without, making it one of an organization's best tools against fraud. Your hotline should allow tips to be sent in anonymously so that employees can report incidents without being dragged into a mess or having it affect their workplace relationships.

3. Institute Internal Controls
According to the ACFE, a lack of internal controls contributed to nearly one third of frauds. The presence of strong internal controls is associated with lower fraud losses and quicker detection. Internal controls formalize review processes, create appropriate segregation of duties, and remove or reduce the opportunity for fraud. There are two major types of internal controls: active and passive.

Active controls are the most common type. They create policies and procedures that actively prevent fraud from occurring. Active controls include segregation of duties, pre-approvals, document countersigning, access and password controls, and physical asset controls.

Passive controls deter fraud by creating the opportunity for fraudulent activities to be discovered. Examples of passive controls are things like audit trail reviews, account reconciliations, ratio analyses, and physical inventories. For smaller organizations that can't realistically segregate duties, passive controls are often extremely useful in detecting — and deterring — fraud.

4. Watch for Red Flags
Life always has its ups and downs. Unfortunately, some of those downs can tempt even the most trustworthy people to steal. Keeping an eye out for red flags among your employees is an important way to protect your organization against fraud.

There are six common behavioral red flags businesses and employees should look out for: living beyond one's means (the top red flag), financial strain or difficulties, family medical issues, unusually close association with a vendor or customer, unwillingness to share duties, and recent divorce or family problems.

While the presence of these red flags does not automatically mean a fraud is being committed, recognizing the behavior perpetrators display can help organizations detect fraud and mitigate losses.

Ensuring that your employees have adequate resources for mental, financial, and family counseling can help keep your employees from reaching the point where fraud looks like the only way out. Organizations can also use culture and workplace surveys to ensure they are providing a safe and rewarding environment for employees.

Fraud Prevention for a More Secure Future
Fraud can result in financial losses, legal costs, and ruined reputations. Without the proper plans and training programs, organizations are more at risk for fraudulent activities. Creating a robust internal fraud protection program and evaluating its effectiveness regularly won't stop fraud completely — but it will surely slow it down.

Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.

About the Author(s)

Timothy Ball

Executive Vice President, The Bonadio Group

Tim Ball is an Executive Vice President and the leader of the Bonadio Strategic Advisory Team (BSA), the Bonadio Fraud and Forensic Accounting and Litigation Support Division (BFF), and the Cannabis Industry Practice at The Bonadio Group.

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