Fraud In The Workplace

In light of the recent developments and allegations of embezzlement at South Whitehall Township I thought it prudent to alert area businesses to the truth behind situations where fraud, embezzlement; or misappropriation funds occurs.

Unfortunately, fraud happens in the work place much more often than we want to believe.  In a 2010 study by Chubb Group Insurance 54% of business owners and executives questioned believed that employees would steal company funds, equipment, inventory, or merchandise in a 12 month period.  Only 7 years ago less than 30% of the companies surveyed expected to see such thefts in the workplace.

Who are these “nefarious” characters committing these crimes?  Often times we find it’s the most trusted long-standing employees.  Those individuals you would never suspect.  So, why does it happen?  What turns these relatively nice people into fraudsters?  To decipher this let’s first look at what famed criminologist Donald Cressey termed as the “Fraud Triangle”.  In most situations when a fraud is committed there are three factors   that are usually present for the ordinary person to commit fraud.  They are Pressure, Rationalization, and Opportunity.

Pressure – individual(s) may find themselves in a financial burden due to gambling or other addictive habits; or they just enjoy thrill of being able to “get away with something”.

Rationalization – Individual(s) look for justifications such as being underpaid, or they’ll pay back what they take, or they see the boss taking cash for various reasons so they should be allowed to do the same.

Opportunity – this usually happens when there is a breakdown or weakness in internal controls.  Individual(s) have control of funds (or other resources) and they have the means to conceal the theft.  Perhaps they are the bookkeeper, loading dock supervisor, etc.

Whatever the reasoning, when these three points are connected there are potentials for huge losses.  According to the Association of Certified Fraud Examiners business may likely average fraud losses of 6% of revenue – in a $1,000,000 business that equates to a $60,000 loss.  In the case of South Whitehall Township the losses are estimated to be over $850,000!

As a business owner, what can you do to prevent fraud?  There are a few different steps you can take:

• Work with your CPA to develop strong internal controls
• Perform criminal background and credit checks on all new employees
• Lead by example
• Develop a “whistle blower” policy
• Restrict signature authority
• Have your CPA conduct surprise audits

If you suspect fraud has occurred or is currently occurring in your business take the following steps:

• Admit that it has happened
• Journal the facts
• Contact an attorney and a forensic accountant
• Be discreet – do not discuss with your employees, especially the suspect

It’s hard enough to own and run businesses, having to deal with a host of others challenges in today’s tough economic and competitive environment, including fraud, makes that job even more difficult.