Protect your Business from the Enemies within-Occupational Fraud

When times are tough, and the economy is struggling to regain its footing, many businesses and individuals find themselves under intense financial and emotional pressure. Salaries are being reduced, lay-offs are rampant, house values are falling, and their financial safety net has unraveled. Morale is down, and fear is up. Survival instincts kick in, and good people do bad things. It’s a fact of life and, because of this, all businesses are susceptible to a fraudulent attack.

Fraud refers to an act committed by a person with the intent of deceiving another person/entity and taking unjust or illegal advantage of it. Occupational fraud refers to such deceptive acts committed by present or potential employees against their employers.

Business Fraud

Business fraud consists of dishonest and illegal activities perpetrated by individuals or companies to provide a favorable financial outcome to those persons or establishments. Also known as corporate fraud, these schemes often appear under the guise of legitimate business practices.

In many small businesses, the primary reason fraudsters can commit their crimes is that management trusts them so much; they’re family members or longtime friends, or they have proven work records and years of service. That high trust level enables fraudsters to hide their activities. Even when business owners find suspicious behavior, they often believe it’s inconceivable that employees would violate these trusted relationships. So, consequently, they hesitate to investigate, which results in much more massive frauds.

Small businesses have it rough, and they are particularly vulnerable to fraud because they lack the resources to implement complete systems of internal controls and properly segregate accounting duties among their limited staffs. However, small businesses don’t have to be rife with fraud.

There are generally three factors that need to be present for fraud to occur: pressure, opportunity, and the ability to rationalize illegal behavior. Unfortunately, the presence of each of these factors may increase in periods of economic hardship.

There are many different types of deceptive acts of fraud committed by employees, including:

  • Misappropriation of funds
  • Theft of cash and checks
  • Theft of goods
  • Inflation of expense claims
  • Creation of ghost employees and the increase of expenses
  • Forging a signature on a check and other documents
  • False document creation
  • Misuse of petty cash
  • Use of office assets for personal purposes
  • Overriding of the company policies and decisions
  • Withdrawal of money from customers’ accounts
  • Creation of ghost vendors
  • False information on an employee resume
  • Leaking confidential information about the business to third parties in return for money or money’s worth
  • Sale of a firm’s goods or assets without the authority

Are you sure that your business is protected from these types of frauds?

If your answer is no, don’t know, not sure or can’t say, then it would mean that you are among many business owners who are unaware of the financial control measures that help shield businesses against such types of fraud. Comparatively, small companies tend to fall prey to this act, due to a lack of effective control measures. Financial control measures are usually given low priority by small business owners, as they do not realize the need and importance of these measures until it is too late.

Financial control refers to the techniques implemented by a business to ensure that every financial transaction is recorded and maintained accurately and is not tampered with – intentionally or unintentionally. It refers to the policies and procedures established by an organization regarding documenting, reporting, and managing financial transactions.

Examples of financial control measures include:

Robust Internal Control System: Refers to the various systematic procedures and methods set up by a firm to carry out its business in an orderly and efficient manner.

Effective Accounting System: Consists of the methods and records established to identify, assemble, analyze, classify, record and report an entity’s transactions, and to maintain accountability of the related assets and liabilities.

Regular and irregular audits. Creation and communication of a written and transparent Fraud Policy for your firm that describes the term fraud, the company’s zero tolerance level against fraud, and the investigation processes and consequences of fraud, etc.

Hiring honest people by conducting a thorough background check. Theft usually starts with petty cash, a small amount. So, it would be advisable to be cautious and aware of the environment in your business. You may need to watch out for warning signals, such as noticeable employee behavioral changes, personal financial problems, light usage of drugs or alcohol, etc.Other ways of avoiding fraud in your business with financial control may include;

  • Purchase merchandise from reputable dealers or establishments.
  • Obtain a physical address rather than merely a post office box and a telephone number, and call the seller to see if the telephone number is correct and working.
  • Send an e-mail to the seller to make sure the e-mail address is active, and be wary of those that utilize free e-mail services where a credit card wasn’t required to open the account.
  • Consider not purchasing from sellers who won’t provide you with this type of information.
  • Purchase merchandise directly from the individual/company that holds the trademark, copyright, or patent.

Surveyed Organizations

More than one-third of surveyed organizations have had some controls eliminated as a consequence of staff reductions during the economic downturn. Paradoxically, it is these organizations that most likely need anti-fraud controls. After layoffs, morale is usually at a low point, the workload is often increased; the pressure to perform can be unbearable and lead to the perfect storm for fraud.

Frequently, fraud is committed by your most loyal and trusted employees. Controls are for everyone, family included.

Embezzlement of funds by employees has been the number one financial crime over the past few decades, so much so, that almost one-third of all company bankruptcies can be attributed to embezzlement. It is therefore imperative to protect your business from the enemies within. Ultimately, what you would be guarding is not a few amounts of money, but your business, the effort it took you to bring it to the present stage and the dreams associated with it! Remain vigilant. Be proactive.


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