Between 70% and 90% of your workforce could be open to committing acts of dishonesty, according to research experiments and expert estimates. So how do you, as employers and plan sponsors, prevent fraud when it can be so prevalent?
Organizations often focus their fraud mitigation activities solely on reducing the opportunity for deceit—typically through internal processes that evaluate and strengthen financial controls, reporting structures, oversight and segregation of duties. However, to better mitigate the risk of fraud, organizations should expand their focus beyond opportunity, notes David Asselstine, CPA, CA*IFA, CFE, senior vice president, finance and chief risk officer of the Teachers’ Retirement Allowances Fund in Winnipeg, Manitoba.
In his article “Protecting Against Fraud by Knowing Human Nature,” appearing in the upcoming July/August 2019 issue of Plans & Trusts magazine, Asselstine recommends the following strategies to help mitigate fraud in your organization.
- Get to know your employees.
- Introduce a code of conduct.
- Encourage introspection among leadership.
- Offer a whistle-blower mechanism.
Get to Know Your Employees
Asselstine writes that organizational leaders and supervisors should study the behavioral elements of opportunity, pressure and rationalization among staff members and get to know employees on an individual level. People may be facing pressures at home, including financial stress stemming from health issues or gambling addictions, and at the office, potentially from the demand to deliver high profits or other corporate objectives. This pressure can make them more likely to commit acts of fraud. Addressing these concerns early on can help to prevent future problems.
Introduce a Code of Conduct
A code of conduct can be a powerful tool, Asselstine says. In one experiment designed to test honesty on an exam, cheating dropped from 70% to zero when participants read an honor code just prior to taking the exam. Yet Asselstine cautions that many organizations with systemic corruption have a code of conduct; the problem is your employees won’t heed it if leadership has created a work environment that contradicts the code.
Encourage Introspection Among Leadership
A code of conduct alone will not result in an ethical work environment. Your leaders must accept that they are prone to the same impulses and pressures that can lead to fraud among other employees. According to Asselstine, the conduct of leaders and the accepted norms of ethical behavior in the workplace have the biggest impact on the risk of fraud.
Inappropriate conduct such as altering financial reports, forging signatures and covering up fraud for supervisors can become accepted if it seems like everyone is doing it. Conversely, when employees see demonstrated acts of honesty day in and day out, they are more likely to follow suit.
[Related Reading: Eight Steps to Enhance Your Plan’s Cybersecurity]
Offer a Whistle-Blower Mechanism
Having a whistle-blower mechanism in place can be an effective antifraud strategy that helps to ensure that your leaders set the appropriate tone. Asselstine cites a surprising statistic by the Association of Certified Fraud Examiners: Approximately 37% of all occupational frauds in the United States were initially detected by a tip from a whistle-blower. This success holds true year after year and around the world. That number truly stands out when compared with this finding: 9% of organizational frauds were discovered by accident, and only 3% were detected by external auditors.
“An effective whistle-blower mechanism, one in which every employee can report material matters without fear of reprisal, will serve to deter fraud and will encourage leaders of organizations to set the appropriate tone at the top—an absolute necessity to an effective antifraud strategy,” Asselstine writes.
Implementing effective internal controls are a necessary step in helping to prevent fraud, but organizations should also focus their efforts on understanding employee pressures and rationalizations, introducing a code of conduct, evaluating the behavior and tone of leadership, and offering a whistle-blower mechanism.
With a broad antifraud strategy, you can empower employees to be part of an honest, ethical workplace.
David Asselstine will present “Dealing With Fraud in Investments” at the Fraud Prevention Institute for Employee Benefit Plans, which runs July 15-16 in Chicago, Illinois.
Robbie Hartman, CEBS
Editor, Publications for the International Foundation
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