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How to Prevent Workplace Fraud

Consider mandatory vacations and surprise audits to deter would-be fraudsters – and try to catch them in the act.
Sarah Johnson, CFO.com | US
May 16, 2012

Even fraudsters need a break sometimes. The ones that are good at pulling off a long-lasting scheme, however, are unlikely to take time off. After all, the concealment of an ongoing fraud needs constant tending and protection from prying eyes.

In fact, fraud can lie undetected for as long as two years if it's perpetuated by managers or executives, according to the Association of Certified Fraud Examiners (ACFE). In a recent report on workplace fraud, the organization suggests companies require all employees to take regular vacations. "A lot of cases that are brought to us or that we read about are brought to light when someone is filling in for someone else," says Andi McNeal, director of research at the ACFE and co-editor of its 2012 "Report to the Nations on Occupational Fraud and Abuse," which was published last week. Job rotations are another way to change up a fraudster's routine.

The ACFE's report stems from a biennial survey of 1,388 certified fraud examiners who investigated at least one instance of workplace fraud during the past two years. Employee misconduct threatens to take a 5% cut out of companies' revenue every year, according to the association. Last year the median loss related to fraud cases in the workplace was $140,000, with more than one-fifth of those victimized companies seeing losses totaling at least $1 million.

The ACFE emphasizes that employee hotlines are the most common way companies root out fraud, even though employees may be reluctant to use them to tattle on their bosses (and hence the reason that executives are able to hide it longer; lower-ranking employees tend to be able to hide for only a year). "Perpetrators with higher levels of authority are typically in a better position to override controls or conceal their misconduct," according to the ACFE report. The second and third most common ways companies first detect fraud are from management reviews and internal audits, respectively. External audits account for only 3% of fraud finds. One theory is because some frauds may fall below auditors' materiality thresholds, McNeal says.

To make up for the lack of detection and to shrink the time it takes companies to uncover wrongdoing — and, ideally, to stop misconduct from happening in the first place — ACFE suggests taking the usual precautions, such as giving comprehensive, antifraud training to all employees; maintaining an ethical tone at the top; and giving the internal audit department adequate resources. The organization also suggests companies consider making sure they have the following:

-Surprise audits, which can reduce the amount of time to detect fraud by 58%.

-A hiring policy that includes past employment verification, criminal and civil background checks, credit checks, and education verification.

-An open-door policy that allows employees to speak freely about pressures, so that management can potentially alleviate problems.

-Anonymous surveys to assess employee morale.




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