5 Tips to Prevent Internal Fraud

Posted by aonenetworks On September 11, 2013

30 days of gratitude- Day 26Businesses are at a greater risk of being robbed by their own employees, than by a random individual. Being proactive is the best prevention; create an atmosphere of awareness, direct employee attitudes, and put caution first in all internal procedures. Here are five tips for implementing simple fraud prevention actions.

  1. Management should discourage fraud. Expect an atmosphere of integrity, starting at the top. Managers should be meticulous and steadfast in observing all laws and taxes, this inherent standard will be passed on to employees through actions and decisions. Display and communicate this expectation, and then monitor it. Always consider fraud as a potential cause of business problems. For example, cash flow issues may be due to a fraud scheme.
  2. Consider internal fraud as a likely occurrence. Motivation for fraud may silently present itself to even the best employee; their credit cards are maxed out, they feel they don’t get paid enough, or feel the owner makes too much money. When met with weak or absent internal controls, this motivation will seize the opportunity. Once a business owner acknowledges this risk is real, common sense will go a long way. Something as simple as reviewing the documentation before signing checks.
  3. Fraud risk is greatest for small businesses. Employees within a small business are responsible to perform multiple tasks, sometimes they are even conflicting tasks. For example, the sales representative may also order the inventory and issue payment on the purchase. Most typically, fraudsters are long-time employees and friends.
  4. Consult with third-party to setup internal controls. Typically CPA firms are specially trained for reviewing and establishing internal financial controls. Contact a CPA or other third-party firm to assist in reviewing your business structure. Part of this review will also include an assessment of the current atmosphere of integrity. Then take steps to implement their recommendation, being sure to align your business objectives and asset protection goals.
  5. Periodically review controls. This review could be conducted by management, but is most effective when completed by the outside firm. The firm would include unbiased discussions with the vendors and/or clients as well as employees. Through the discussions, they would be listening for small changes and key phrases that may indicate broken or weakened controls.

Fraud schemes will typically fall apart if they are not overseen for just a few days. Encourage all employees to go on vacation and pay attention to those that do not. Consider requiring job rotation, to cross-train employees and to observe for suspicious activity. If there is fraud – prosecute. This can be a very effective deterrent.

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