Reducing risk easier than recovering losses

When it comes to fraud prevention, changing the attitudes and actions of owners and managers can be more important than knowing what a dishonest employee is about to do.

As an owner or manager, it’s possible to unknowingly create situations that not only invite embezzlement but enable it.

Though you may be used to looking at reports and asking questions about the figures you see on paper, how well do you understand what goes on behind the numbers?

Your employees are behind the numbers, including trusted individuals who you’d never think could pose a fraud risk to your organization.

The more you know about your risks, the better able you are to help your organization save money by eliminating opportunities to commit fraud.

First, to reduce the risk of embezzlement, you must accept that it can and does happen inside any entity that handles money. If you think it can’t happen to you, then you only increase the risk it will occur.

We all like to think we’re good judges of character, but the most common words a fraud investigator hears are, “I didn’t think he/she was that type of person.”

Second, just because you can’t see it now doesn’t mean that embezzlement hasn’t happened. Such crimes can take place undetected for several years.

Third, pay attention to your “gut feelings.” Perhaps it’s the explanation you receive about a questionable expense report item, a payable or a receivable.

Search for supporting documentation and follow up. It takes a little extra time, but it can pay large dividends.

Pay attention: Does an employee’s lifestyle match his/her income? Does an employee frequently work after hours? Does someone with many responsibilities skip vacations? If an activity seems wrong, investigate it immediately.

You can implement a number of internal controls to reduce your risk of fraud. Two of the best: Divide key responsibilities between employees and check your employees’ work unannounced.

Criminal suspects often admit being able to do practically anything because of their access to so many records and because no one ever looked at what they were doing.

When was the last time your organization conducted a fraud check-up? It may be worth the expense to have an experienced professional periodically investigate your internal controls.

When fraud is found

If you discover you’re the victim of fraud, do you confront the employee you suspect? Stay calm, but have a plan of action. Act quickly but act correctly.

If you have a fidelity bond – which is the best-case scenario – contact your insurer and also speak with an attorney when you discover the theft to get legal advice.

A mishandled confrontation and/or investigation can result in further losses if the suspect sues your organization because it can’t prove its case.

Entities sometimes confront suspected employees who confess; however, the suspect may only divulge what he/she thinks you already know. You may not learn the true extent of the crime or your losses.

Suspects often try to reduce the damage they’ve caused by seeking sympathy, offering apologies or promising to make restitution, which you might never receive.

Another common problem is obtaining what some fraud examiners call a “blanket confession.” This is where the suspect generally explains what happened but does not confess to a specific crime.

Here’s an example: An employee tells you he/she stole $10,000. You might think this a satisfactory confession, but it won’t stand up in court if the individual doesn’t identify specific fraudulent transactions, such as how, when and where the crime was committed and what was done with the money. Tie confessions to supporting records.

How you document what is said or done during a confession can affect the way a suspect’s statement can be used in court by your private attorney or a prosecutor.

Prosecution

Prosecuting fraud demands skill and experience. Not everyone speaks your industry’s language, which can be a major challenge in investigating and prosecuting white-collar crime.

It’s difficult to translate a complex set of facts and supporting documents into an understandable product a jury will find interesting and easy to follow.

If a jury loses interest, or the presentation is too complex, the purpose is defeated. Working successfully with the legal system takes skill. That’s what certified fraud examiners bring to the process.

David Bowden is a senior consultant with BKD LLP, and a member of BKD’s Forensics & Dispute Consulting team. He is a certified fraud examiner.