How to Catch an Employee Committing Fraud
By Adam Decker, Marketing –
Company management must learn how to think like a thief to effectively combat corruption in their businesses.
The old saying “It takes a thief to catch a thief” may prove true for business owners.
The Association of Certified Fraud Examiners reported in 2014 that a typical organization loses 5 percent of its revenue to fraud yearly if it lacks adequate internal controls. These stolen assets are rarely recovered and their being scattered throughout financial statements may obscure the true size of the loss.
Look at your business and ask yourself, “How and where could I steal without much risk?” Thinking like a thief can help you see your weaknesses and set practices to protect your business and raise awareness of fraud.
To help you to see where you are vulnerable, you should consult the so-called “fraud triangle,” which encompasses three factors that may enable someone to commit fraud or embezzle from your company.
Side One — Opportunity for Fraud
Opportunity is the first side of that triangle and one that can be difficult to pinpoint. Factors that provide opportunity are a lack of written policy and procedure, inadequate or unclear separation of duties, a lack of mandatory vacations, and infrequent review of the company’s financial statements or account activity.
Another factor that can open the door to fraud is upheaval within the company. Crisis situations, rapid turnover in employees, and the lapses in organization that follow can open the door for fictitious suppliers or employees, padded time or expense sheets, and missing inventory.
Side Two — Motivation
The second side of the triangle is motivation. It’s not only people with financial problems that may steal from the company. Those with addictions, whether it’s alcohol, drugs or gambling, as well as persons embroiled in marital difficulties are also more likely to consider fraud. Screening applicants carefully and performing background and credit checks are of utmost importance.
Side Three — Rationalization
Side three of the triangle is rationalization, or justifying the right to steal. While this exists primarily in the mind of the thief, it also involves employee perceptions about the company. If an employee feels underpaid, unappreciated or overworked, or that the business owner is making an inordinate profit without any trickle down, fraud can seem more easily justified. The relationship between management and employees is of paramount importance here.
There are some red flags that should alert the business owner to possible fraudulent activity. Altered or photocopied documents, checks written to cash, unexplained differences in inventory records, and bank accounts not promptly reconciled are indications that you may have a problem. Also be alert for employees who may appear to be living above their means or who have become too friendly with suppliers.
Fraud is insidious and easier to prevent than root out. So check your defenses, organize your internal controls, stay alert, and hire a professional for a fraud deterrence study if necessary. Your bottom line will thank you.
Another new defense is rising in the form of EyeDetect™, a new deception detection technology. It provides companies with the means to detect those who are involved in fraudulent behaviors through the computer analysis of eye movement. This technology has the potential to eliminate a large amount of fraudulent behavior we see today.
