Accountability Will Always Be Important
It’s an uncomfortable topic, but fraud is an issue that all organizations will face at some point. Nobody wants to think of their employees as dishonest. Many businesses ignore anti-fraud policies because they believe everyone who works for them knows right from wrong.
The sad reality is that employees can act unethically, and organizations lose significant resources due to theft and lack of accountability.
This blog will examine the significant causes of fraud, how it affects organizations, the internal controls that prevent fraud, and why external auditing is crucial to fight fraud and mitigate risk.
What Is Employee Fraud?
Simply put, employee fraud is the false representation of facts resulting in one party experiencing loss due to the actions of another. The legal definition of fraud includes the following elements:
- A false statement of a material fact
- Knowledge that the statement was untrue
- Intent to deceive
- Injury sustained by the victi
The key element is intent, since it’s possible for a company to make false representations or lose assets due to mistakes or incompetence. Mistakes become fraud when an employee is trying to hide them, further compounding the situation.
What Causes Fraud in Companies?
While widespread fraud is uncommon, there are several factors that make it more likely to occur. Many of them revolve around a deficiency in controls and accountability.
Lack of separation of duties – The risk of fraud declines when multiple employees are involved in each phase of a transaction. Inventory and asset management is another area where duplicity and clearly defined responsibilities mitigate fraud. While separating duties makes it difficult to commit fraud, it can create delays and inefficiencies. Also, poorly defined job descriptions lead to confusion, and are particularly risky for smaller businesses where employees have a wide range of responsibilities.
Lack of safeguards – Assets need to be protected, and this can range from password-protected accounts to badge access in certain parts of a building.
Complexity – Complex transactions are easier to manipulate, especially ones involving estimates.
High employee turnover – High turnover among managers and employees in general leads to a loss of institutional memory regarding how transactions are processed, meaning less attention is paid to controls.
Poor documentation – Easily modified records or a lack of records in the first place can make employees more inclined to engage in fraud.
No internal or third-party audits – Audits are designed to spot and correct inappropriate transactions, and when they’re skipped or ignored, fraud usually goes undetected for long periods of time.
External pressure – Investor or donor expectations, pressure from management to meet performance targets, and high amounts of debt lead financial managers to commit fraud.
What Are the Effects of Fraud in Business?
The obvious effect of fraud is financial loss, and that loss doesn’t have to target the company. Employees can also commit fraud against customers and vendors by stealing identities or credit card information. Lost tangible goods can cost a company quite a bit of money. Even nonprofit groups can be victimized by fraudulent employees who steal donated items and money. The effects of fraud on an organization can vary depending on the nature of the fraud, but one thing is certain: any entity that experiences fraud can find it difficult to recover.
How Internal Controls Prevent Fraud in Business
How do businesses and nonprofit groups fight back against fraud? The answer lies in internal controls. While it’s easy to equate “controls” with “bureaucracy,” strong internal controls can limit mistakes, get rid of redundancies, and, perhaps most importantly, reduce the risk of fraud.
All operating units within an entity must develop a system of internal controls to ensure the assets and records of the company are protected from loss, theft, and alteration. The key is finding a resource that strikes the balance between control and efficiency and helps businesses delegate authority, assess processes, and find issues.
Rubino’s Audit Services Are an Important First Step
While it’s impossible to monitor everything everyone in your company does at every moment, there is a way to ensure accuracy: periodic audits.
Rubino is committed to providing an accurate audit of your business or nonprofit, so financial information is communicated to your stakeholders accurately and fraud is easily detected.