How the Risk of Detection Reduces Fraud

Do your employees feel like they’re being watched? If they don’t, they may be emboldened to steal. In the same way that putting more police officers on streets tends to reduce crime, making your company’s anti-fraud activities more visible can discourage fraud perpetrators.

Good internal controls are critical to preventing fraud. But many companies have learned the hard way that employees bent on fraud can find their way around internal controls if the incentive outweighs the risk. You must, therefore, make sure that your employees — including senior managers — understand that the risks of committing fraud are greater than the rewards.

Make Your Program Visible

There are a number of ways to increase the perception of detection in your company, but the first is education. An ongoing, visible fraud information program fosters the belief that anyone who commits fraud will be caught, simply by demonstrating that fraud is always on the company radar screen.

Fraud education should begin with employee orientation and continue with ongoing employee training programs. Familiarize employees with your company values and expectations, and train them to know what constitutes fraud. Educated employees aren’t only more likely to notice and report fraud if they spot it, but they’re also less likely to be tempted to perpetrate it.

Setting up a confidential tip line also can help create an environment of vigilance, particularly if you routinely publicize nonspecific statistics about the calls it generates. If, for example, your employee newsletter prints statistics regarding the number of calls received and the actions taken as a result, employees may be more likely to view the hotline as a viable means of reporting suspicious activities. And, again, you’ll communicate that the company takes fraud detection and prevention seriously.

Take It to the Top

While education and hotlines can help drive thoughts of fraud out of the minds of line employees and middle managers, the biggest schemes often stem from people higher in the chain of command. As many high-profile corporate scandals have shown, CEOs and CFOs aren’t immune to the temptation to defraud their companies and their shareholders.

One way to suppress such temptations is to ask senior managers whether they’re aware of any fraud in your organization. CEOs who commit fraud often must enlist an accomplice or two. When financial advisors or auditors ask about fraud during the course of their duties, it puts senior managers on notice that oversight isn’t limited to the rank and file. And there’s always the chance that one of the accomplices will report suspicious activities.

Periodic surprise audits, too, can dissuade upper management from acting on any fraud impulses. While such audits can’t be comprehensive, they can serve as spot checks in high-risk areas such as inventory, sales and accounts receivable. They also can be powerful deterrents to artificial asset inflation or other financial statement falsifications.

Let the Punishment Fit the Crime

Finally, if you find fraud, punish it. Too often, companies worried about the effects of adverse publicity wrap up their fraud investigations with only threats and beefed-up damage control efforts. That does little to convince would-be fraudsters that their activities will bring more pain than gain.

In fact, criminally inclined employees — as well as suppliers, customers and other stakeholders – may interpret a mere hand slap as an invitation to cheat your company.

Fear Factor

Fraud is a risk that can have catastrophic consequences. Send a loud and clear message that fraud will be detected and punished, and you may find you’ve diminished your risk significantly.