Learning How to Prevent Business Fraud
Businesses have to always be careful about fraud. Here's how you can detect the early stages of business fraud and how to prevent it.
The COVID pandemic has resulted in many companies trying to reduce non-essential operations to cut burgeoning costs in response to the downward spiral of revenues. These cost-cutting measures, however, have unintended consequences.
In some cases, internal controls are weakened because certain positions or processes were deemed non-essential. Thus, these were pared down to the bare minimum. Business processes are also being streamlined and consolidated to reduce manpower costs. Additionally, certain positions are being eliminated and incompatible responsibilities are being assigned to the remaining personnel.
For example, in one company, sales personnel were tasked to monitor sales, issue receipts, and collect payments because the cashiers' or collectors’ positions were reduced or eliminated. This resulted in the absence of "check and balance" controls. Sales personnel are thus exposed to undesirable opportunities, such as underreporting sales and intentional pocketing of collections— all without being detected.
A Look at Business Fraud
As a Certified Fraud Examiner, myself, I have encountered many fraud cases where employees who perpetrated the fraud claimed that they were “good people” and that they were just tempted to take the money because of emergencies (such as someone in the family getting sick or mounting debts because of insufficient income). While it is true that a person who committed the crime has no one else to blame but himself, I believe that companies should always strive to ensure that their operations are not susceptible to potential fraud schemes.
I also believe that management should "protect" their employees from committing fraud by installing the necessary protocols in their business. Fraud detection and prevention measures should be a top priority—especially in these pandemic times where many employees or even outside parties will be tempted because of reduced income and/or a lack of job opportunities.
But how can a company—that is also trying to make both ends meet—make sure that it does not commit the mistake of sacrificing controls in favor of cost-cutting measures? The simplest way, I believe, is for the company to ensure that it does not expose its employees to the “Fraud Triangle.”
The Fraud Triangle, Explained
The Fraud Triangle is a proven concept wherein fraud in a business setting can only occur if three (3) elements are present—Motivation, Opportunity, and Rationalization (MOR). Let me explain below.
Motivation
The first element, Motivation, refers to the employee mindset. For example, if an employee is being pressured to achieve unrealistic targets, then he or she might be forced to think about cheating to achieve the targets. If employees know that the company is cheating customers by delivering substandard products, they might think that cheating is okay.
An employee might also be motivated to commit fraud if he or she has personal issues, such as mounting hospital bills, addictions, debts, and other financial-related problems.
Opportunity
The second element, Opportunity, refers to circumstances that allow fraud to easily occur. This is the only element that a company exercises complete control over.
Examples that provide opportunities for committing fraud include weak internal controls, such as lack of supervision and poor documentation of processes. It also includes poor separation of duties—meaning putting only one person in charge of reporting, recording, and safekeeping theft-prone assets like cash and inventory.
