Many fraudulent activities can be caught by putting effective internal processes and procedures in place, but don't forget one of the best sources of fraud protection: your employees. And in order to detect and prevent fraud, employees must first know 1) what to look for, and 2) what to do about it.
So let's start with the basics. First, train your employees on your company policies and procedures, making sure they know and follow the rules and guidelines. It is important that they understand the repercussions of committing fraud – up to and including criminal prosecution. Equally important, employees should know how to identify possible fraud.
Focus on training employees to identify sources of fraud, such as:
- New account fraud – setting up accounts based on stolen identity or personal information
- Credit card fraud – using credit cards without authorization and/or transactions outside of company-approved uses
- Check fraud – using checks without authorization, or using fake checks
- ACH/wire fraud – fraudulent ACH or wire transfers, including Business Email Compromise (BEC)
- Phishing – fraudulent attempts to get personal or company information that can be used to perpetrate identity theft
- Identity theft – using another individual's personal or financial information without his or her consent
- Invoicing for products or services that were never provided
- Over-invoicing for services (i.e. billing for unneeded services; the services were performed but were not needed or requested)
When it comes to employee fraud, it can happen in many ways. Some of the most common involve accounting, accounts payable, and payroll functions. Consider putting the following financial processes in place:
- Cross-train employees to perform basic financial functions. Relying on one person to handle a financial process makes it easier for that person to commit fraud.
- Create separate duties with checks and balances built in such as requiring multiple approvals for expenditures. Have multiple employees keep the books, handle payroll, make deposits, and reconcile bank statements.
- Train employees to perform basic internal audits – outside of their normal work area. Oversight is a great deterrent.
Establish set procedures for what employees should do if they suspect internal or external fraud. Your procedures for handling external fraud can be fairly straightforward. For example, if a cashier suspects that a customer is attempting to use a stolen credit card, they should immediately notify a member of management before proceeding further.
With internal fraud, the actions taken may not be so clear-cut. Many employees will hesitate to accuse others of illegal or unethical behavior. It is therefore critical to create a climate of trust by establishing a confidential way for employees to share their concerns.
In short, to help protect against fraud, thoroughly train your employees, and then follow up to make sure that training is consistently put into practice. Effective training can help protect against fraud both externally and from within.