The Single BEST way to prevent FRAUD – part two…

Let’s stick with the story of my colleague’s client who has suffered three separate embezzlements in as many years. In the last post I talked about basic internal controls for vendor payables – and there are more to consider than the one’s I mentioned. Internal controls are not sufficient in isolation, however. A clever thief can get around internal controls if they really want to. So what stops them? Bottom line, no one wants to get caught stealing. The Perception of Detection is what prevents fraud.

What do I mean by the perception of detection? It is the belief that management is vigilant at all levels and that any fraud will be detected and prosecuted in short order. It is simply not worth the risk to steal. The Association of Certified Fraud Examiners has definitively concluded that the perception of detection is more important than internal controls in minimizing fraud losses.

So what is happening in the client company? Three separate embezzlements in three years tells me that the employees in the company absolutely, positively believe that no one is watching them. Is there any supervision over the AP function, or accounting in general? Does the company perform month-end close? Is there a manager, but that manager doesn’t know enough about accounting to recognize that the workers are stealing from the company? Is there any training in fraud prevention and detection? Are there so many vendors that the embezzler can sneak in a phony vendor and no one knows the difference?

Maybe this is a small company with so few staff that they can’t properly segregate duties and the owner is swamped. I hear this all the time, but really, let’s get more creative. Is there a board member who could receive and review the bank statements if the owner is too busy? Can you engage your CPA to perform quarterly reviews of the AP function if you know you have a weakness there? Since full recoveries are rare, the company is already making an effective investment in the loss – how about spending those funds on salary instead and properly segregating the duties? I have heard owners say in front of their staff that they are too busy building the company to look at the bank statements or any other accounting data. No perception of detection here.

In future posts I will talk in detail about how to increase the perception of detection, but start thinking about how strongly your employees believe in your company’s ability to prevent and detect fraud. In my next post I’ll describe the third problem that may be a factor in this company’s losses: the Tone at the Top.