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(Second in a five-part series)
By Darren W. Welker, CPA, CIA, Principal
Shareholder
Manager of Risk Advisory and Outsourced Audit Services
In our previous article in this series, we discussed the increased risk of fraud during an economic downturn and the importance of fraud prevention programs. Fraud prevention programs are critical because fraud losses are very difficult to recover and can be devastating to a business, particularly in tough economic times.
The starting point for any fraud prevention program should be the establishment of a corporate culture that promotes ethical decision making and has zero tolerance for fraud. This is often known as the "Tone at the Top", and weaknesses in the Tone at the Top are seen when analyzing the cause of corporate frauds. You can set the Tone at the Top by doing the following:
• Establish Policies – Policies are management's tool for communicating guidelines for employee behavior and decision-making. Consider implementing a Fraud Policy, a Code of Conduct, and a Conflict of Interest Policy to explicitly define your expectations.
• Create a Positive Work Environment – Employees who have a positive view of their employer are less likely to rationalize fraud. Good managers set realistic financial goals, care about their employees, avoid autocratic decision making, and treat all employees fairly.
• Provide Fraud Awareness Training – Tips are the most effective method of detecting fraud. Employees who understand fraud are more likely to detect and deter fraud – train employees on expectations for ethical behavior and common fraud schemes.
• Establish Effective Human Resource Practices – Perform background checks to avoid hiring high-risk employees, evaluate compensation programs to avoid incentivizing unethical behavior, and implement employee assistance programs to help those who may be suffering from problems that often cause desperate (and fraudulent) behaviors.
• Maintain a System of Internal Controls – Internal controls help to prevent, detect and deter fraud. Common controls include segregation of duties, independent reconciliations, authorizations related to cash disbursements and new vendors, and mandatory vacations.
• Implement a Fraud Hotline – Be sure to look for Part 3 of our fraud series in next week's newsletter – an in-depth look at how you can establish an effective fraud hotline.
Previous article:
Part 1 - How to Develop an Effective Fraud Prevention Program
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