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Occupational Fraud: Five Internal Controls That Can Reduce Your Risk

This second article of our fraud series offers five internal controls that will help you reduce your risk for occupational fraud.

As we discussed in our last article, businesses of all sizes, in all different types of industries, are potentially vulnerable to the risk of occupational fraud. According to the Association of Certified Fraud Examiners (ACFE) 2020 "Report to the Nations," the typical organization loses 5% of its revenues to fraud each year.
What's more, in more than one-fifth of these cases, occupational fraud losses totaled $1 million or more. The fraud cases in the ACFE study lasted roughly 14 months before they were detected.
To see how costly occupational fraud can be, consider the potential impact of even a relatively minor theft of $25,000. If the company's net margin is 5%, it would need $500,000 in new sales to compensate for the loss.

The Fraud Triangle

The first step in reducing your company's exposure is understanding how it occurs. Debbie Innes, Executive Vice President, Treasury Management, for Cadence Bank, points to what's referred to as the "fraud triangle" to explain.
"For fraud to occur, three separate elements must be in place: financial pressure, rationalization and opportunity," says Innes. "There's not much owners and CEOs can do about financial pressures their employees may be facing or their ability to rationalize theft, but they can implement strong internal controls to eliminate most of the opportunities employees have to commit fraud."
Internal controls are checks and balances designed to reduce fraud risk by removing most of the temptations employees might have to steal from their employers. According to the ACFE study, organizations that were victims of fraud but had implemented internal controls suffered lower overall fraud losses and detected the fraud faster than those that had not implemented strong internal controls.
The most fundamental internal control, says Innes, is to segregate financial and accounting duties among different members of your staff. "The idea is to limit opportunities for one employee to commit fraud and cover his or her tracks because no one else is watching." For example, separate employees should receive and open mail with checks for deposit, complete bank deposits and enter receipts in the records.

Five Key Internal Controls

There are many different internal controls that can help reduce fraud risk at your company. Here are five to consider implementing right away.

1. Establish dual controls for vendor acceptance and sign-up, as well as all financial transactions. Separate employees should initiate and approve all payments, both paper and electronic. This step alone will uncover most check kiting and receivables lapping schemes.


2. Ensure proper management oversight of finances. Simply put, you and your financial managers cannot be hands-off when it comes to financial management. For example, you should personally examine monthly bank statements and spot check invoices, delivery receipts and purchase orders. This lets employees know that someone is watching. Most employees will appreciate this, rather than resent it, since it shows them that you're serious about fraud prevention.


3. Implement your bank's fraud prevention tools. These include Positive Pay and ACH Positive Pay, services that help prevent check and electronic fraud by comparing all checks and ACH debits presented to the bank for payment with a client-issued list. The bank only pays exact matches — all others are referred to you for a pay-no pay decision. Also consider Lockbox, which helps reduce receivables fraud by having checks sent to the bank for deposit, instead of to your business, where duties are segregated.


4. Make sure financial and accounting employees take all their vacation time. Employees who are committing ongoing fraud usually don't want to be out of the office for more than a few days at a time for fear their scheme will be uncovered. Require financial and accounting employees to take at least one full, uninterrupted week of vacation each year.


5. Set up a fraud hotline. Employee tips to management are one of the most common ways occupational fraud is uncovered, so it's important that employees be able to report suspicious activities anonymously. Companies with employee fraud hotlines experience half the fraud losses of those that don't have them, according to the ACFE.

Please contact your Cadence Bank Treasury Management representative if you would like to discuss fraud prevention steps in more detail.
You might also like:
How to Guard Against Occupational Fraud
Internal Fraud: Six Ways Your Bank Can Help Reduce Risk
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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