Top Ten Most Practical Fraud Prevention Tools for Business

On average businesses lose about 5% of total revenue to diverse and creative fraud schemes. Many books and movies have been produced that describe the most interesting and prolific fraud schemes. These productions provide an interesting story but usually do not address what really matters, "How do I prevent fraud in my company and how can I do it without spending a fortune?"

This blog presents a list of fraud prevention tools for business, that will have the greatest fraud prevention impact for the least amount of investment (i.e., biggest bang for the buck), based on my experience. Also included with this list is brief explanation of each tool. Future blogs will address these tools in greater detail.

1. Tone at the Top: It costs nothing to set the proper tone at the top. In contrast, a highly negative tone at the top can cost a company everything. Employees get their behavioral queues from the company leadership. Inappropriate behavior engaged in by the company's leadership, will provide the employees with the rationalization that they can misbehave as well.
2. Division of Responsibility: Division of responsibility will force a fraudster to engage in a conspiracy with others thus compounding the difficulty of perpetrating a fraud. Unfortunately, many small companies simply do not have the volume or staff size to accomplish the appropriate division of labor. Under these circumstance, the benefits of this tool can be approached by implementing job rotation and mandatory vacations. Division of responsibility can also apply to IT system access permission. For example, the person hiring employees should not have the ability to set-up the employee master file.
3. The Threat of Discovery (or, The Sword of Damocles): As the odds of being caught increase the rational fraudster will become less and less inclined to conduct a fraud. The threat of discovery can be accomplished by:
   1. Conducting random audits or spot checks
   2. Installing video cameras
   3. Using unidentified checkers
   4. Conducting a routine annual audit
   5. Random computer analytics
4. Written Code of Ethics and Code of Conduct: A conversation with a trusted advisor and little research on the internet can give you all you need to draft a Code of Ethics and a Code of Conduct. Once drafted, it should be posted and distributed to all employees. With instructions to read, understand, and retain.
5. Training and Performance Evaluation: Ethics courses can be purchased and viewed online. Employees should be required to view at least two hours of ethics courses per year. The courses used should have performance tests and the performance on the final test should be submitted to HR, the CFPO or the Business Owner. Additionally, the score on the performance test should be part of the yearly employee performance evaluation.
6. Background Checks: There are hundreds of companies that do background checks for a fee. These are simple and inexpensive to purchase. A background check should be performed for every hire and every significant promotion.
7. Communication: Most frauds are discovered by a whistle blower. Therefore, the business must ensure free flowing communication either through a contractor (i.e., consultant or a hotline provider), or by simply walking around and building personal relationships, with management and staff. If a hotline is used, it can either b3e implemented via phone call-in or through a website.
8. Prompt and consistent fraud response: When fraud is discovered, it must be promptly punished. Otherwise, the other employees with lose respect of company leadership and the tone at the top (item #1 above) will be greatly diminished.
9. Employment Agreements: The employment agreement should contain references to some key fraud prevention tools:
   1. Employee must adhere to the Code of Ethics and the Code of Conduct
   2. Employee cannot misappropriate trade secrets, customer lists, and other intellectual property.
10. Procurement Policy and Authorization Matrix: The procurement policy should establish the rules for purchasing and/or contracting for goods and services. These rules relate to bidding procedures, documentation requirements, and required approval signatures. The authorization matrix is a listing of the purchase authorization level for each level of management.

Resolution Experts PC, "ResX, PC", provides independent forensic accounting services for complex litigation and contract compliance and fraud. ResX is based in Michigan and serves clients throughout the United States. For more information and to learn about working with ResX, please visit our website: www.resxpc.com. Follow our page on LinkedIn here.

The preceding narrative presents concepts that are dependent on facts and circumstances. These concepts can change depending on the specific facts and circumstances of an individual matter.