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VOL. 127 | NO. 99 | Monday, May 21, 2012

Culture of Ownership Can Help Mitigate Fraud

By Chris Glenn

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We need to talk more about fraud. We spend time with statistics and case studies to help us understand occupational fraud in general, but we need to clearly articulate how fraud negatively affects us all, and why it’s important that we as a business community talk about it.

The most important thing we should understand about people who commit fraud is: they don’t look how most people assume criminals to look. The Association of Certified Fraud Examiners’ (ACFE) 2012 Report to the Nations on Occupational Fraud and Abuse shows that the typical perpetrator of fraud is male, reasonably well educated (37 percent of perpetrators have college degrees), between the ages of 36 and 45, is an employee or manager (rather than a business owner), has been at their job or organization for between one and five years, and has never been charged with a previous crime.

But “typical” doesn’t always help us identify the perpetrator of fraud. For instance, women have proven to be the perpetrators of many recent high-profile cases of fraud, both in Memphis and across the country.

Most people who commit fraud start out as merely the co-worker you pass in the hall, waiting for the potent cocktail of Incentive/Pressure, Perceived Opportunity and Rationalization to take hold. Dubbed the “Fraud Triangle,” this combination can drive an otherwise good person down a bad path. That makes this subject much more difficult and ambiguous to discuss, doesn’t it? Unfortunately, there is sometimes an attitude within an organization that talking about or acknowledging the possibility of fraudulent behavior leads to an aura of mistrust between management and its employees, and therefore should be avoided. This is the wrong attitude. Studies show that an estimated 5 percent of a typical organization’s revenue is lost to fraud annually. While it is vitally important that every leader in an organization works to instill a strong “tone at the top” regarding fraud prevention and detection, those same leaders should also nurture a culture of ownership at every individual position in their organization. It is critical that management foster an environment where every employee feels empowered, and even obligated, to do their part to mitigate the risk of occupational fraud. If money or assets are being misappropriated from the organization, it affects the organization’s bottom line, public perception and eventually each individual employee.

More than 43 percent of reported fraud is detected by anonymous tip, by far the most effective form of detection. As an executive or owner, you must make it your mission to set the tone regarding the subject of fraud prevention by developing and enforcing an anti-fraud policy. Reconcile your bank statements and truly examine the related supporting documentation. Examine and evaluate your cash handling processes for proper segregation of duties. Encourage job rotation or mandatory vacations; most fraud is discovered when the fraudster isn’t around to keep up the scheme. Conduct a fraud risk assessment, and implement surprise audits of your riskiest areas. Provide fraud awareness training and require mandatory attendance of directors and managers. Specifically, encourage employees to take note of behavioral changes in their fellow employees. Ensure they know who or where to go to if they suspect fraudulent or unethical behavior (a direct supervisor, a fraud hotline, Internal Audit, Human Resources, etc). If your employees don’t know, make them feel comfortable enough to ask.

Most importantly, talk about the subject of fraud. Demonstrate your awareness of the subject and your emphasis on preventing it. A culture of ownership and awareness will help deter the “perceived opportunity” and therefore undercut that leg of the “Fraud Triangle.”

Chris Glenn is a manager at Dixon Hughes Goodman LLP, specializing in construction and real estate, financial institutions, and manufacturing, distribution and services.

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