Employee fraud is more common than most businesses think. It can have differing impacts on the success of a business. In the most serious of cases, employee fraud can lead to business failure and destroyed careers.

Misplaced trust, inadequate hiring and supervision policies, and a failure to implement strong internal controls create an environment that is ripe for an employee to commit fraud.

Employee fraud is therefore about opportunity. Subsequently, businesses should take steps to reduce this opportunity.
The following guide includes:
• an overview of fraud, including common examples of fraud
• examples of strategies to reduce the risk of fraud
• information on what to do when a fraud is detected.
Businesses designing strategies to reduce the risk of fraud will have to balance their desire to minimise such risks with the business needs. In other words, a business must avoid becoming so focused on reducing the risk of fraud that it impairs the ability of the business to meet its commercial objectives.

“Fraud is behaviour that is deceptive, dishonest, corrupt or unethical. For fraud to exist there needs to be an offender, a victim and an absence of control or safeguards.”

Fraud is generally described in three categories:
1. asset misappropriation
2. fraudulent accounting and financial reporting
3. corruption.

Conversely, fraudulent activity is usually motivated by one or more of three main factors:
1. pressures
2. opportunity
3. rationalisation.

Opportunity is the element that every business should be seeking to reduce.

Strategies to minimise the risk of Fraud.

As the old saying goes “prevention is better than a cure” and this is certainly true when considering how to manage the risk of employee fraud. The most important aspect to managing this risk is ensuring that the business has solid internal controls in place as, for every fraudulent activity, there is always a breakdown of internal controls.

Minimising the potential for fraud will require designing and implementing internal controls that prevent, detect and deter most fraudulent behaviour. The successful implementation of such internal controls begins with the “tone at the top”. Managing the risk of fraud requires the business owners and senior managers to support and adhere to all policies and procedures implemented to manage this risk. The success of internal controls also requires that they be visible, built into the day-to-day work of the business and that employees are held accountable for their actions. In addition, internal controls should be continually reviewed and, where appropriate, amended.

It is important to realise that employee fraud cannot be eliminated but the risks of it occurring can be substantially reduced. The strategies to reduce the risk of employee fraud must strike a balance between the need for such controls and not “micro-managing” employees, therefore businesses will have to accept some degree of risk of employee fraud.

Through the implementation of some or all of the following strategies, your business can minimise the risk of becoming a victim of employee fraud.