4 Ways to prevent fraud in a trusting workplace environment

by Darin Styles, CPA, CFE

Over the years, I’ve heard countless stories about organizations being devastated because of an employee’s fraudulent actions—e.g., embezzlement, misappropriation of assets, and plain-old stealing, to name a few. The common thread between many of these tales is the pure shock expressed by the organization’s leaders in the aftermath. In nearly every case, the person who committed the fraud had held a position of trust.

The truth is, no organization is immune to fraud, and trusted individuals aren’t immune to the types of pressures that could lead to wrongdoing. This is particularly challenging for nonprofit organizations, as staff and board members want to believe that everyone is there to further the organization’s mission—and not their own pocketbooks.

If a person is motivated to commit fraud, the only thing standing in their way is your internal control system. To help prevent bad actors from taking advantage of a trusting environment, here are four best practices for strengthening yours.

Perform background checks on new hires

Subjecting new hires to a background check may not feel like the best way to welcome someone to your team, but it may prevent a potentially devastating instance of fraud in the future. Depending on your organization’s structure, you might require these for all positions, or only for positions of trust. Regardless, take care to be thoughtful about your approach. Although a certain level of trust is critical within a workplace environment, it should never be blindly given.

Implement a mandatory vacation policy

A mandatory vacation policy states that all employees must take a minimum number of vacation days each year. Not only can it help to keep your staff sane but it also provides an opportunity for staff members to occasionally perform other staff members’ duties. And this can help to both prevent and identify an instance of fraud, as the back-up employee might notice something odd or suspicious. If an employee claims “no one can do this but me!” or is protective of certain files or processes, consider it a red flag.

Establish the threat of detection

Fraud typically starts out small and ramps up over time. Often someone makes an honest mistake, realizes they can get away with it, and then makes it a habit over months or years. If employees know managers are checking up on certain processes or functions on a regular basis, or that their role will be covered while they’re away on vacation (see above), they are much less likely to consider committing fraud.

A threat of detection doesn’t have to be a super formal or time-consuming process; it simply needs to send the message that employees’ actions are being monitored. Most important, employees need to know the organization’s owners or management are reviewing their work on at least a periodic basis.

Set the right tone at the top

A toxic workplace culture can be a breeding ground for fraud, and is often a result of the example set by the organization’s leadership. Unrealistic earnings goals, for instance, may encourage fraudulent behavior. Or, if the owners and senior management are lackadaisical regarding controls, employees may think it’s OK to be the same. Setting an appropriate tone at the top—and doing things the right way without cutting corners—could go a long way to safeguarding your organization from fraud.