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Fraud mask

Fighting workplace fraud

Wednesday, July 07, 2021 @ 1:30 PM | By Jennifer Lynch and Margot Mary Davis

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Jennifer Lynch
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Margot Mary Davis
It is every business’ worst nightmare, being a victim of occupational fraud. Unfortunately, it is a common reality. Each year, organizations, on average, lose five per cent of their revenue to occupational (employee) fraud. Generally, employee fraud continues for 14 months until being detected and results in median losses of $125,000. For business of less than 100 employees, occupational fraud’s impact is especially severe. Small businesses generally report median losses of $200 000. The three major types of occupational fraud are asset misappropriation, financial statement fraud and corruption, with asset misappropriation accounting for an overwhelming 86 per cent of occupational fraud.

Business owners want to know how to combat employee fraud. While occupational fraud can never be eliminated, businesses can take proactive steps to reduce their chances of being a fraud victim. In this two-part series, we provide some occupational fraud-fighting tips based on expert advice, statistics and psychological theories about what motivates fraud.

Make it difficult to commit fraud

It is much easier to steal money from an unlocked cabinet than a locked cabinet. While this example may be overly simplistic, it does show how opportunity motivates people to commit fraud.

The fraud triangle, which is a major framework that explains why fraud occurs, explicitly states that pressures, perceived or real, opportunities and rationalizations all motivate individuals to commit fraud. Statistics bear out this theory. The Association of Certified Fraud Examiners’ (ACFE) 2018 Report to the Nations noted that weaknesses with internal controls were to blame for approximately half of frauds and a lack of internal controls was responsible for 32 per cent of asset misappropriation cases. For small businesses, the rates were even higher. A lack of internal controls was responsible for 42 per cent of occupational fraud at small businesses. 

Reducing the opportunities to commit fraud is arguably where employers have the most control. An employer has no control over whether an employee made a bad financial choice in the past but they can rotate tasks. Businesses should adopt controls that are associated with lower levels of employee fraud. Frequently, whistleblowers used fraud hotlines to inform upper-level management of fraud. Employers should adopt these hotlines. Additionally, businesses should ensure multiple employees handle bookkeeping and they should require two signatures on cheques above a certain amount. Duties should be segregated. Businesses should be cautious of employees who never take a holiday. Some small businesses might argue controls are costly and thus difficult to implement. However, this is clearly a money spent, money saved scenario.

Make workplace cultures anti-fraud cultures

Probably, the most obvious way to make sure a workplace culture is anti-fraud is to make sure the “tone at the top” is anti-fraud. The ACFE’s 2020 Report to the Nations notes that a “poor tone at the top” was the fourth most common risk factor for occupational fraud and a poor tone at the top trickled down to all employees. Rationalization is an element of the fraud triangle. If executives are engaging in unethical behaviour, employees might use that to rationalize fraudulent behaviour on their part. Executives and directors should ensure that they are exhibiting top ethical behaviour and the corporation should require them to sign a code of ethical conduct.

While the “tone at the top” might be one of the most salient aspects of workplace culture, other aspects of workplace culture are important in combating fraud. Insular workplace cultures have higher incidences of fraud and are more likely to attract fraudsters. Reflecting this trend, family businesses often have higher rates of fraud than non-family businesses. To fight insularity, corporations should ensure there are outsiders on the board of directors and corporations should ensure company meetings do not become echo chambers. A policy should be in place to explicitly ask for divergent positions on potentially controversial questions surrounding the business at board meetings.

Additionally, workplaces should not be about meeting financial targets by any means necessary. Excessive pressure to meet financial targets is associated with higher levels of occupational fraud. While corporations are not charities and do want to be profitable, they should highlight to employees that ethics come before financial success. Additionally, corporations should reconsider offering shares to employees and consider some other incentive. If shares are offered to employees, employees have a vested interest in the corporation succeeding (even if not honestly) and they also have a vested interested in hiding fraud.

We hope businesses find this advice helpful! In our next piece, we will discuss the valuable role employees play in the fight against fraud.

Stay tuned!
This is the first part of a two-part series. 

Jennifer Lynch is an accomplished forensic accountant and business owner. Jennifer is a Chartered Professional Accountant, Certified Management Accountant and a Certified Fraud Examiner who has a reputation for expertise, quality service to clients and professionalism. You can reach her on LinkedIn. Margot Mary Davis is a 2018 Ontario call to the bar. She is interested in policy issues surrounding law like combating counterfeit goods and developing sui generis policies for orphan drugs. She is also a published author.

Photo credit / Jack_Aloya

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