Although most employees have no intention of stealing from their employers, fraud happens regularly to employers in every country, regardless of the size of the company or the industry. In the webcast, Employee Fraud—Prevention, Detection and Response, recorded on October 10, 2023, the speakers explained that employee fraud is pervasive. Fraud schemes are often not complicated, although uncovering fraud can take months or even years to unravel. The consequences of fraud can take a financial toll on an organization, including the actual amount of the fraud loss, the potential for reputational harm, and the cost to investigate and prosecute. Financial losses due to fraud are not recovered in approximately half of these cases.
Chetan Sehgal, a partner at BDO Canada in Toronto, Ontario, defined common types of fraud and who the “fraudster” is, explaining that fraud can be conducted by employees, customers, third parties, consultants or business partners. The fraudster could work in an environment ripe for fraud and may know about HR or accounting systems’ weaknesses or that there is a degree of complacency allowing for systems to be circumvented.
Three topics discussed in more detail for employers include minimizing risk, detecting warning signs and red flags, and understanding leadership’s responsibilities for overall fraud prevention.
Minimizing Fraud Risk
Organizations attempt to prevent fraud by putting in controls. Ultimately, the controls help to minimize fraud, but they may not entirely prevent it. A few action items to minimize risk include:
- Having a plan—Develop clear policies and procedures, set a culture of ethical behavior, etc.
- Reducing exposure to fraud—Conduct a fraud risk assessment, operate in an internal control environment, etc.
- Performing surprise audits and spot checks—Use data analytics tools, conduct independent audits, etc.
- Establishing consequences of nonadherence to the internal controls in place.
Warning Signs of Fraud
There are always early warning signs of fraud—sometimes, multiple warning signs. Some employee behaviors that raise red flags include:
- Living beyond their means and/or financial difficulties
- Control issues and having an unwillingness to share duties with co-workers
- Bullying or intimidation
- Family problems
- Other excessive pressures.
Roles and Responsibilities of the Board
Bishara Rizek, a partner at BDO Canada in Oakville, Ontario, explained how the organizational leadership—including management, trustees and the board—can “set the ethical tone” of the organization by:
- Formalizing the roles of fraud risk management
- Performing continuous monitoring
- Recognizing when explanations don’t add up and when further investigations are warranted
- Communicating management’s commitment and expectations
- Understanding the organization’s auditing strategies.
Tune in to the webcast recording to learn more about how employers can understand and mitigate their fraud risk.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.