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When Fraud Happens Right Under Your Nose

January 21, 2020

by Darin Styles, CPA, CFE

Fraud in the workplace has, unfortunately, become somewhat commonplace. According to the results of the Association of Certified Fraud Examiners (ACFE) Global Fraud Study, a typical business loses an average of 5% of income each year due to fraud alone. Even still, business owners who fall victim to fraud often ask themselves “how could we have not known about this?” In many cases, the answer is simple: No one reported it.

Regardless of what the scheme involves, it’s rare for a perpetrator to operate in total anonymity. It’s likely that someone else knew about the fraudulent behavior, or at least had suspicions that something was up. They may have just not had a way—or felt comfortable enough—to report it.

Here’s how you can prevent this from happening within your organization.

1. Implement formal fraud-reporting policies and procedures.

Surprisingly few small to mid-size businesses have a formal fraud reporting or whistleblower system. If one exists, it’s usually just a line in the employee handbook. Large corporations have such systems, of course, as do any size businesses within highly regulated environments (e.g., banks).

Fraud hotlines can be effective, but they shouldn’t be a standalone solution. The most important thing is to have a formal fraud policy. This policy, among other things, should clearly spell out what employees should do if they witness or suspect fraud or other unethical conduct.

2. Foster a culture that encourages employees to speak up.

Employees typically don’t report fraud or suspicious behavior for one of two reasons: they’re worried about retaliation, or they assume the complaint will fall on deaf ears. This is why an organizational culture that values open communication is so critical to fraud reporting. Employees need to know that it’s OK to say something if they see something, and that their report matters.

One way you can foster this type of culture around fraud reporting is to talk about fraud. Consider reviewing your fraud policy with your staff on at least an annual basis. Remind employees know that your organization takes fraud seriously, and that they can report it without fear of retaliation.

At our firm, for instance, we review fraud-reporting procedures as part of our yearly firmwide training session and make sure managers are regularly encouraging employees to speak up. You could also hold town hall-style meetings that give employees the chance to ask questions—and be as transparent as possible with your answers.

3. Make sure the person receiving fraud reports is prepared.

The person designated to receive reports of fraud should be someone who can do something about it. In most organizations, this will be a trusted member of the HR department. It could also be the business owner (although sometimes this isn’t an option—business owners already have enough on their plates) or even an independent law firm.

Your fraud policy should include procedures that outline how this person should respond to a complaint of fraud. At a minimum, these procedures should include following up with any whistleblowers, so they know their complaint was taken seriously.

Don’t let fraud happen right under your nose.

No organization is immune to fraud. Laying out formal fraud-reporting policies and procedures, fostering a culture of open communication, and taking appropriate follow-up actions can help you keep it from happening right under your nose. If you have questions about establishing a fraud-reporting or whistleblower system, we’re here to help. Contact us today.


Meet the Expert

Darin Styles, CPA, CFE

Darin helps businesses find solutions to their complex challenges with a focus on fraud prevention and forensic analysis.

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