Fraud A Big Problem for Businesses

When fraud is discovered within a business, the initial response is "How could that have happened?" Fraud is a deliberate deception for the gratification of an individual or group. Fraud can be divided into many categories, the major one falls under employee fraud Schemes included billing abuse, check tampering, bribery, skimming, cash and non-cash robbery, payroll fraud and stealing of financial data, equipment and stocks.

The Scope of Fraud to Businesses
The scope of fraud to businesses is difficult to estimate because not all fraud is discovered. Fraud affects businesses directly through economic loss but indirectly there is the legal, accounting, and increased insurance costs. Additionally the loss of productivity associated with hiring and firing employees are additional factors that must be considered. Unfortunately it is the trusted and valued employee who generally commits fraud. In most cases, offenders do not view stealing from companies as harmful; they may think that the crime was victimless; and they do not view their theft as being costly to the business. Many frauds occur because the opportunity exists and the person responsible does not believe he/she will be caught.

Factors That Make Small Businesses Susceptible to Fraud
Small businesses are far less likely to be able to recover from frauds because they have limited capital and they do not carry employee theft insurance because it is deemed to be “to expensive.” The owners of small businesses are usually deeply involved in the business, and rely on that involvement to prevent fraud. Additionally, small businesses often employ friends, family members, and “trusted individuals.” Due to their small size, they are not large enough to provide an adequate division of duties and a system of checks and balances, which exists in a larger company. Because many small businesses rely on personal trust and personal relationships, rather than systematic systems of internal controls, they are particularly vulnerable to fraud.

Prevention
There are some steps that business owners can take to prevent fraud. Hiring the right employees is the best way to stop fraud before it happens. Screening employees is critical, perform background checks on potential employees including the applicant’s criminal history, civil history, and drivers’ license violations, and verify his/her education, past employment and references. Since employees experiencing financial difficulties may be more prone to committing fraud, think about requesting a credit check as well.

Your business should implement a system that spreads the financial duties of the business among two or more employees. This reduces having one person handling all of the money. Store bank checks in a secure location and carefully review bank statements month, taking special care to look for checks made out to cash, employees or suppliers you do not know.

Another effective way to prevent fraud in your business is to create a positive work culture. It is important that the business owner and senior management serve as role models of honesty and integrity. If the individuals at the top take a careless approach toward company policies and procedures, they are inviting their employees to do the same – or worse.

Clear standards should be implemented from the beginning, a company-wide written code of conduct along with a zero tolerance policy for employee theft. To maintain credibility, be sure to conduct a prompt and thorough investigation of every incident. Establish a system that makes it easy for employees, vendors and customers to anonymously report suspected fraud activities. Be sure employees understand what constitutes fraud and that all reports are treated confidentially and without punishment. Consider hiring an accountant to conduct both regularly scheduled and surprise audits. Audits can serve as a deterrent because when employees are aware that there will be checks of their areas, they are more likely to stay honest.

Conclusion

Fraud and white collar crime have increased and professionals believe this trend is likely to continue. The cost to business and the public can only be estimated, as many crimes go unreported. Also, the expansion of computers into businesses may make organizations more vulnerable to fraud and abuse. In order to combat fraud and white collar crime in businesses, a concerted effort must be exerted by the management of the business, the external auditors, and by all employees of the business. Everyone must realize that fraud is not a victimless crime. The cost of fraud and theft are shared by all through higher costs and lower profits. Through adequate control methods, everyone can start to combat frauds.


Prevention Tips to Remember

• Eliminate opportunity. A business creates the opportunity for fraud when it does not have basic checks and balances in place.
• Maintain oversight. Use your financial statements as an early warning system for fraud. Know how to read your financial statements and what signs of fraud look like. Protect your assets by staying involved in your business.
• Lead by example. Model the ethical, honest behavior you want from others. A boss that skims cash, underreports income, or engages in other questionable business tactics makes it easy for employees to rationalize committing fraud.
• Be careful in hiring. Interview carefully, check references and conduct background checks.
• Be approachable. Make sure your employees feel appreciated for their contribution to the business and feel like they can talk to you if they have a problem.
• State the obvious. Have a written policy that fraud is unacceptable. Everyone in the company has a vested interest in preventing fraud. Educate employees about fraud, the effect it has on the business and them. Have a procedure that helps employees feel comfortable reporting suspicions of fraud.