Preventing internal fraud and embezzlement

According to a recent study that has caused serious waves in the corporate world, fraud and embezzlement are far more common than everyone, even many of the world’s leading experts had previously imagined.

The study, which admits that it applies a rather broad definition to the word ‘fraud’, states that around 10% of companies are committing securities fraud, to the tune of US$830 billion in equity value in 2021 alone.

It’s easy, and far more comfortable, to think that fraud and embezzlement doesn’t occur within your business. But with accounting violations being committed by an estimated 40% of companies, the chances are far higher than most business owners and leaders imagine.

Thankfully there are a number of ways to mitigate the risk of fraud and embezzlement within your organisation. Here are five of the most effective.

1. Understand the incentives.

The fraud triangle is a trio of elements that can help to explain an individual’s decision to commit fraud: opportunity, motivation and rationalisation. If these three elements simultaneously overlap, the likelihood of a worker committing fraud skyrockets.

Personality doesn’t drive fraud – circumstances do. Incredibly, it is estimated that just 10% of people would never commit fraud for any reason. 10% are at the other end of the spectrum, actively looking to commit fraud. The remaining 80%? They’d commit fraud if the right conditions were met – a phenomenon known as perfect place syndrome.

In order to minimise the likelihood of internal fraud, an organisation must do what it can to minimise the opportunity, motivation and rationalisation that drives it.

2. Establish the right culture.

Are 90% of people really capable of committing fraud? Yes, often because they either don’t realise or are willingly blind to the fact they are doing something wrong.

This is the case even in the most high profile instances of fraud, such as Enron and FTX. Despite awaiting trial on arguably the most serious corporate fraud charge in history, FTX founder Sam Bankman-Fried continues to insist that he didn’t steal funds, and that he could’ve saved his company if he wasn’t arrested.

Sunlight is the best disinfectant. By putting the issue of fraud and embezzlement centre stage, your workers will be better at recognising questionable actions, both in themselves and others, and will be more aware of the consequences of doing the wrong thing.

3. Establish systems and procedures.

When detailed systems and procedures are established and followed, opportunities to commit fraud are significantly reduced. To this end, an organisation should ensure it:

• Uses purchase orders religiously.
• Balances sales slips and register receipts every day.
• Tracks cheques.
• Uses technology and regular stock takes to closely manage and track inventory.
• Separates business functions that could facilitate fraud, such as mail opening and posting.

These are just a few of the most important systems and procedures that should be established, but every process with the potential for fraud, misuse and abuse should be documented and monitored.

4. Utilise unannounced audits.

An annual audit conducted by an outside firm can form an effective defence against fraud and embezzlement. But regularity breeds predictability, and a fraudster can begin to find workarounds.

An organisation should pair a comprehensive annual audit with regular, unannounced internal audits that focus on specific areas and elements of the business. As these audits cannot be planned for, they are more likely to catch out more complex (and often more damaging) instances of fraud.

5. Lean on smart tech.

The sad reality is that a committed fraudster – particularly the one in ten who are actively looking for an opportunity – could sidestep every one of the fraud prevention measures mentioned above. Culture, awareness, procedure and audit efforts can only do so much for one simple reason: they’re driven by humans.

But there is a way to greatly reduce the likelihood that your business will be robbed by someone from the inside. By leaning on the right technology, you can gain far more visibility, and thus far more control, over your business.

A real-time cash management solution like Certomo tracks the complex financial comings and goings of your business, serving up insights in a simple and intuitive way.

Such a solution can automatically identify and flag instances of potential fraud. In this way technology can take the bulk of the labour out of fraud prevention. Bots do the legwork, and a human is brought in when a potential instance of fraud or embezzlement is found.

Fraud is more common than you might think, and businesses that don’t take preventative steps are far more likely to become victims. But a combination of awareness, good governance and smart tech can greatly reduce vulnerability. The power, as always, is in the organisation’s own hands.