Why Companies Are Fearful of Fighting Fraud

Fear No. 1:   Cost. Like insurance, fraud prevention software is a cost for which you don’t always recognize an immediate return. Management wants money brought back to the bottom line, and it’s easy to assign a dollar figure to payment errors using platforms like duplicate invoice analysis. But when it comes to identifying and preventing risk and potential fraud, returns can be harder to quantify.

Fear No. 2:   Technology. Companies are concerned that implementing new software technology might increase their exposure to fraud via data breaches. They’re also concerned that technology will replace internal auditors. While data encryption and similar tools can combat the risk of data breaches, addressing personnel concerns are trickier.

Fear No. 3:   Loss of reputation. Companies might fear their reputations will take a hit if they uncover ongoing fraud schemes. Social media has evolved to become an incredibly popular form of information sharing, so all it takes is the hint of a rumor and the damage is done. Employees might post information, or alleged information, that makes it appear as though a company is attempting to hide something. For that reason, it’s to a company’s advantage to be open with their employees in their effort to fight fraud. Employees are less likely to whistleblow in public when there are safe, internal options for them to report discrepancies to management. For example, use proactive social risk-management strategies, such as toll-free hotlines, to help employees feel comfortable reporting potential or suspected frauds without the fear of retaliation.

FIGHTING FRAUD ON THE FRONT LINE

Companies must realize that the benefits of fighting fraud far outweigh the fears. Engagement in an early fraud education process acts as a buffer, which could lead to fewer fraudulent losses. Professionals in procurement and payables must implement efficient processes that address red flags and track, early and upfront, non-adherence to mandates. Below is a quick overview of best practices for engaging analytic tools and front-line staff to identify and prevent fraud.

  • Tone at the Top.  Of course, top-level management must be committed to address fraud prevention. However, it’s just as important for middle managers to adopt a zero-tolerance policy toward fraud. A lack of integrity can be contagious. If workers see their supervisors rubber-stamping processes, it gives them little incentive to raise concerns when they find inconsistencies.
  • Segregation of duties.  No one person should be responsible for an entire accounting function. The individual who sets up a vendor or client shouldn’t be the same person who approves invoice payments. It’s vital to have multiple eyes on the process, especially in smaller organizations where segregation of accounting duties might be limited or non-existent.
  • Create a fraud-fighting culture.  The very perception of detection helps prevent fraud. A fraud-prevention overview should be part of new employee orientation. Companies also should sign off on internal codes of ethics that outline the steps and procedures employees can take if they suspect fraud. Tips are consistently, and by far, the most common detection method. According to the “Report to the Nations,” a compilation of detailed information regarding occupational fraud cases from the Association of Certified Fraud Examiners (ACFE), tips detected more than 40 percent of all cases. Publicize a hotline number, both internally and externally for your vendors, one of your employees might even be seeking to collude with a client!
  • Training and process audits.  Perform anti-fraud training for employees annually, at a minimum. Increase your anti-fraud training if you have a substantial number of new employees coming on board. Annual fraud awareness and detection training sends a clear message to employees about your organization’s high standards and could deter fraudulent activity.
  • Vet suppliers and clients.  If you want to avert various types of fraudulent schemes, it’s crucial that you understand the red flags to look for when onboarding a supplier or client. Vendor vetting in real time can mitigate upfront risks and dictate those actions required to prevent fraud from slipping undetected through the system. Vendor portals prove invaluable for vetting suppliers using automated data validation.
  • Take action.  There’s no reason for you to identify or perform analysis if you’re unwilling to take action. Fraud prevention software can help you do more than detect fraud—it can highlight poor processes that might expose you to fraud. For example, you might have a legitimate vendor or client, but software can raise a red flag because of gaps in your set-up process. Analyze results, make changes, monitor and constantly learn from your processes.

If you have any questions regarding fraud or how you can prevent fraud from happening to you, contact Christopher Didio, CPA, CFE.