Preventing organizational fraud demands systematic planning and implementation. This entire process, from inception and assessment to performance evaluation is complex, even in smaller organizations. Yet, the payoff for the effort can be huge.
In this post, we offer an overview of the elements of a fraud prevention program that would be useful in any organization. Summarized from, Managing the Business Risk of Fraud: A Practical Guide, produced by a consortium of associations, the guidelines point to specific steps managers can take to implement an effective fraud prevention program. … Continue reading
Occupational fraud is a huge drain on organizations’ resources, costing an estimated global loss of $3.7 trillion dollars annually. And according to the Association of Certified Fraud Examiner’s (ACFE) 2014 study, just 14% of defrauded organizations are able to fully recover their losses.
Fraud is a very real threat to the bottom line of almost every organization in our economy. But it can be prevented, or at least mitigated.
There are 3 steps in setting up a fraud prevention program in your organization:
Understand what fraud is and how it is likely to emerge.
Identify potential sources of fraud in your organizations.
Take steps to prevent fraud through processes or controls.
Ultimately, a healthy anti-fraud corporate culture that permeates from the top down will make your organization more crime resistant. This will take time to nurture, and it will take continuous effort to sustain, but in the end you can make occupational fraud an extinct disease in your workplace.
Payroll fraud accounts for about 9.3% of occupational fraud at a cost of over $300 million per year across all types of organizations. One of the most common forms of payroll fraud is the use of “ghost employees” to divert money to fraudulent identities. Like all organizational frauds, this is a hidden crime that can best be prevented by controls designed to expose all payroll transactions.
The Ghost in the Payroll Machine
A “ghost employee” exists only as an identity in payroll records, although the ghost may be a real person who does not actually work for the company. The ghost employee scam is only successful if the perpetrator has unmonitored access to company systems, so it is typically an inside job. The scheme works if:
The ghost identity can be added to payroll records.
The system has to be set up to make payments to the ghost, either for false time and/or wages, or for other types of payments, e.g., expense reimbursements.
Payments made to the ghost must be concealed, especially from existing controls.
The phrase “Due diligence” sounds complicated but in reality, it is simply the process of doing your homework before you make a major commitment, either on a business or personal level. Due diligence can be as simple as just asking the proper questions and making sure that a situation is “not too good to be true.” This idea of checking into the facts behind a transaction to ensure it is fairly valued is the source of the old adage, “let the buyer beware.”[i]
Most of us practice due diligence even though we may not think of it that way. For example, most people these days will do some research on the internet before making a major purchase, like buying a car. We scan websites to get an idea of a fair price, the dealer cost, and any low interest financing deals so we can be prepared to counter the ”rock bottom price” offered by the car salesman. In this process, we are doing our “due diligence” to get the best deal possible.
Due Diligence as a Defense
There are important legal uses of the term “due diligence.” It began as a term describing a legal defense in the Securities Act of 1933. Its purpose in that Act was to give broker-dealers a defense against an accusation that they had not disclosed information in a securities transaction. If they had performed “due diligence” in researching the company, they could not be held liable for information they did not discover.[ii] … Continue reading
You’ve seen the data before: Organizational fraud is a huge annual cost. Managers want to reduce the costs, so the real questions are to learn why fraud occurs and what to do about it.
The most compelling explanation for organizational fraud is the Fraud Triangle, as summarized in our recent infographic. Frauds occur when there is opportunity, one or more employees are under perceived financial pressure (incentives exist), and they can rationalize their fraudulent behavior. These 3 factors correspond to the legs of the triangle.
Control the Opportunities to Reduce the Chances of Fraud
In our experience, organizations can reduce the probability of organizational fraud by just removing one of those legs of the triangle. There are things you can’t control, such as employees’ spending habits, but if you remove the opportunity for employees to get their hands on an asset without the potential of getting caught, then you’ve reduced that probability by 50 percent. … Continue reading
