In its simplest form, effective fraud prevention can be broken down into three pieces. The substantive policies, procedures, and activities which a company implements can be complex, but are sometimes best understood within this simple framework.
Why is fraud prevention so important? Experts estimate that companies lose 5% to 6% of their annual revenue to fraud. Stop and think about your company’s bottom line. Is the company profitable? What percentage of revenue is the bottom line profit?
Many companies are not profitable, and fraud may be one reason. Lots of other companies have razor thin profit margins, and everyday fraud by employees can devastate the bottom line.
A comprehensive fraud prevention program can be broken down into three parts: education, investigation, and proactive prevention.
The most common way to detect internal fraud is through a tip from an employee, customer, or vendor. Since employees are likely to report misdeeds, it makes sense to give them the knowledge to help the company.
Company-wide education of employees is, therefore, an integral part of a fraud prevention program. Broad-based fraud education for all employees is recommended, with more specific anti-fraud training presented by department and by position within the company.
While fraud prevention efforts are aimed at stopping employee fraud, investigations will always be a necessary evil. There will still be some fraud schemes perpetrated, so investigations must be performed relative to these scams.
Further, investigations are an important part of fraud prevention because of their deterrent effect on other employees. One of the most effective preventive tools is the “perception of detection.” When employees believe that management is actively looking for fraud and punishing those who are guilty, they are less likely to commit fraud.
The bulk of a company’s fraud prevention efforts will be focused on the creation and implementation of proactive preventive techniques. A traditional system of internal controls should be enhanced with policies and procedures that are specifically designed to prevent fraud.
One of the best ways to develop policies and procedures that are effective in prevention corporate fraud is with the assistance of an experienced anti-fraud professional. By working with a fraud expert who has investigated hundreds of frauds, the company will be able to develop the most relevant and most effective anti-fraud controls.