Internal fraud: How to prevent it

Have you noticed signs of internal fraud in your business? Internal fraud occurs when the company’s employees carry out illegal activities and it could range from one employee to a group of employees. Even though internal fraud is usually committed by a small number of employees, it could have a great impact on the organisation and its future. In the past 10 years, Australian employers have lost $350 million to internal fraud. While internal fraud doesn’t discriminate, the financial services and banking sectors are at a greater risk, due to the nature of their operations. All employers should know how to recognise fraud and should educate employees so they can identify it themselves.

Internal fraud: Red flags

Internal fraud is not easy to spot and if an employee has been doing it for a while, that means one of two things:

1. The culture within the company allows this type of behaviour or
2. They get better at hiding it

Employers should look out for any unusual behaviour, especially from individuals with sensitive work responsibilities. Some signs can include:

The employee refusing to share possibilities with other colleagues: If a manager proposes that an employee works with another colleague on a project but they keep making excuses as to why that should not be the case then that might be a sign to pay more attention to the everyday tasks that the employee completes. Refusing to delegate work doesn’t necessarily mean that the employee is committing fraud but in combination with other signs it can indicate that there is a strong possibility that something is going on.

Skipping steps and taking shortcuts: If an employee is consistently not following the correct policy steps or is constantly taking shortcuts by not obtaining approval, it’s necessary to talk to them and try to understand why they’re not complying with company processes. Talking to them early can help managers figure out whether this is intentional or unintentional (for example employees being absent-minded).

Delivering inaccurate statements: If an employee is regularly providing the company with inaccurate statements or makes questionable mistakes in them, then the company should try to figure out what the problem is quickly. Is it really possible that the employee submits inaccurate statements again and again? Does it show that they don’t pay attention to detail or are they trying to hide something?

Entitlement and aggressiveness towards those who question them: Is there an employee in your workplace who becomes aggressive when someone asks them questions about the work? Becoming defensive or secretive about completed work is never a good sign. This type of behaviour becomes worse if an employee questions another on how their work is progressing and the colleague responds by retaliating against them.

Bad contract management and new suppliers: One of the things to look out for is how many contracts an employee closes and how often the company changes suppliers. Is your employee unnecessarily switching from one supplier to another? Are the suppliers real? A lot of the time employees who are committing fraud may be working with shell companies in order to move money around.

More signs could be:

• Seeking permissions for accountants and software they shouldn’t have
• Lack of documentation about the decisions and purchases
• Lack of background checks on high-risk employees
• Password sharing
• Financial difficulties or living above their means

Again, it is important to stress here that fraud is not not being committed solely because an employee presents some of these signs. It could be two or more that may raise red flags for your organisation.

Why do employees commit internal fraud?

Fraud is usually committed when the three elements of the fraud triangle are met. Those are:

• Motivation
• Opportunity
• Rationalisation

Motivation

Is there a reason for the employee to commit fraud? An employee who found themselves in a difficult financial situation or felt unfairly treated by the company (missed out on a promotion or raise) may see that as enough motivation to commit fraud against the company.

Opportunity

Opportunity usually presents itself in companies where policies are not enforced, preventative measures are weak and it’s easy to get access to financial accounts without anyone noticing or checking.

Rationalisation

Even ethical employees will try to rationalise fraud as something they have to do to survive. Other reasons that employees may use to convince themselves they’re not doing something wrongdoing something right is ‘Everyone does it’, ‘Corporations steal from customers anyway’ and ‘No one will notice because the company doesn’t need the money’.

Can you prevent internal fraud?

Internal fraud can be prevented if the components of the fraud triangle aren’t met. The unfortunate reality is however that some people ignore the risk and commit fraud anyway. The challenge then becomes how easily and fast you can detect fraud. As with all risks, it might not be viable or cost-effective to completely eliminate the risk, but there are some simple controls you can use to greatly reduce the risk of fraud. Here are some ideas:

• Segregate duties in high-risk positions
• Implement a notification system
• Perform audits regularly
• Build an ethical culture starting from the top
• Enforce your policies
• Educate your employees on how to recognise internal fraud
• Talk to your employees

Segregate duties in high-risk positions

One of the easiest ways to prevent internal fraud is to segregate financial duties and data roles. If an employee works alone, then they don’t have anyone to monitor their work and ensure that they’re doing everything ethically.

Implement a notification system

Ensure that you have an effective working system that will notify you if a purchase goes above the allowed limit or if more stock than necessary is being purchased. Even if it’s a false alarm, it’s enough to encourage another employee to check what’s going on and see that everything is working properly.

Perform audits regularly

You should perform biannual audits but also random audits in your company. It’s a good idea to check staff wages, overtime hours or if all employees on the payroll are still working for the company and are real. A common type of internal fraud is setting up a ghost employee who gets paid for work they aren’t actually performing. The money goes directly to the employee who set them up.

Build an ethical culture starting from the top

What kind of behaviour do supervisors and managers show to their team? Do they reinforce zero-tolerance against unethical behaviour or do they let things slide? As mentioned before, there are three components of the fraud triangle that need to be satisfied for fraud to be committed. If managers and supervisors aren’t acting ethically, it might indicate to other employees that they can commit fraudulent activities and they will go unpunished.

Moreover, letting things ‘slide’ might indicate that the manager/supervisor might be engaging in those activities themselves. That’s why it’s really important to run background checks on high-level employees. Ethical high level employees can ensure the people in their teams are complying with company policies and have the best interest at heart.

Enforce your policies

Enforcing policies can prevent employees from rationalising their decision to commit internal fraud. The way the company enforces policies is also important. There are a few steps the organisation can take including:

• Written or verbal warning
• Suspension
• Relocating the employee to a different department
• Demotion
• Dismissal

Once policies have been enforced, communicate with employees the steps you took and why. You don’t need to mention any names, but informing them of the actions the business took against fraud can deter future unethical practices.

Educate your employees on how to recognise internal fraud

Training employees doesn’t have to be boring. Ask your employees what is their favourite way to learn and look for resources that will help them recognise internal fraud and its consequences. Keep in mind not all employees will like workshops, group activities and day-long training. Some may like to complete modules or other activities in their own time.

Make fraud training mandatory but adapt it to your employees and their needs for better results. If you are operating in a risky industry, it is advisable to develop a schedule that sets out how often training is carried out. This is because employees may forget, the severity of internal fraud may fade over time and there are always new ways to commit internal fraud without being noticed.

Talk to your employees

Are you checking in with employees to see how they are feeling and what they think of upcoming decisions? Building a professional relationship with employees isn’t limited to working well with them but also talking to them and building better team morale. If the company sees employees as just numbers, then it may make it easier for employees to rationalise fraud. Checking in with your employees shouldn’t only be done to prevent fraud, it’s an essential part of being a good manager that can help them manage workload and delegate tasks better.

Are you suspecting internal fraud?

When our clients decide to investigate reports of internal fraud, they rely on Polonious to make the process more efficient and faster. We help investigation teams across the world build better workflows, set up a strong reporting system and upload their files in a secure and confidential system. Polonious can be accessed from anywhere, anytime, by investigators.and they can also set up reminders for tasks or case updates for those involved.

Do you want to know more about how we can help you? Request a demo!