As a forensic accountant, many of the financial fraud investigations I’ve worked on were not triggered because someone was actively looking for an embezzling employee. Far from it. Most business owners or stakeholders usually don’t expect to find something amiss in their companies. They trust their teams, their processes seem solid, and, on paper at least, everything looks as it should.
Then, a glitch occurs. A staff member notices an inconsistency. A vendor raises a concern. A customer complains. And suddenly, a small red flag is raised.
Here’s the hard truth: Most cases of fraud are not uncovered by diligent audits or strong internal controls. They’re discovered purely by accident or through a tip.
Take the case of a business I recently helped. A trusted, long-time bookkeeper managed all of the company’s finances, including collections, vendor payments, bank reconciliations, and financial reporting. No one oversaw or reviewed her work, and her duties were not divided with anyone else. Essentially, she had free rein to do what she wanted. And, as we would soon find, she did.
A single phone call would be her undoing. A vendor rang the company about a missed payment—and alarms went off. We were hired to dig into the company’s finances and found the bookkeeper had been altering transactions and siphoning off funds for months. She was able to get away with it because the company was not on guard for fraud and had allowed her unfettered control of the entire accounting process.
Business leaders often fail to realize just how vulnerable their enterprises are to employee fraud—especially if they place too much trust and authority in the people who control all or a portion of their financial processes. Yet they can do something to reduce their risk. They can educate themselves and employees about ways to spot fraud, create a corporate culture that discourages such behavior, and take concrete steps to proactively prevent and detect fraudulent activity.
AWARENESS STARTS WITH YOU
As a business owner or stakeholder, you are the first line of defense in the fight against employee fraud. If you want to protect your organization, you must be aware of the risks and take action to reduce them. In the case of the bookkeeper, the leadership team didn’t recognize that by giving one person full control over the company’s finances and trusting her blindly, they were essentially handing her the keys to the vault. Here’s how you can avoid a similar fate and start building fraud awareness at the top of your organization:
1. Educate Yourself First:
Learning about fraud after it’s already occurred is a little like learning how to lasso cattle after they’ve run away—useful when you have your next herd. It’s better to understand fraud before it happens and to take the time to understand where your organization may be vulnerable. It’s not enough to assume everything’s fine because nothing has gone wrong yet. In our example of the bookkeeper, the business had never considered internal fraud even a possibility. Don’t make the same mistake. Learn about fraud risks, and you’ll be better able to spot weaknesses in your financial processes.
2. Conduct a Vulnerability Assessment.
As we noted, the bookkeeper was able to cover up because she had total control over the company’s books. A vulnerability assessment would likely have spotted this issue. In an assessment, a fraud expert pinpoints the gaps in your financial processes that may endanger your organization and asks questions such as: Is too much power concentrated in one person’s hands?; Are financial duties properly segregated?; Are patterns developing that could lead to abuse? Remember: An estimated 5 percent of annual company revenue is lost to fraud; A risk assessment may help prevent hard-earned income from bleeding away.
3. Lead by Example:
Fraud prevention starts at the top. When business owners take fraud seriously, the rest of the organization will follow. If you prioritize fraud prevention, your team will understand that this isn’t just a box to check—it’s a critical company value and a key part of protecting your business.
EMPOWER EMPLOYEES TO SPOT FRAUD
Once you’ve taken steps to educate yourself, it’s time to empower your employees. Your team plays a critical role in preventing and detecting fraud—provided they understand what to look for and are encouraged to speak up. Here are steps business leaders can take:
1. Provide Fraud Awareness Training:
If her fellow employees had been aware of the warning signs, the bookkeeper we investigated may have been caught far earlier. Employers need to give their workers the tools to recognize the red flags that may indicate fraud. Pro Tip: When fraud awareness training does occur, it should be designed specifically for your business and the types of fraud that your employees may encounter.
2. Foster a Culture of Openness:
If employees feel comfortable reporting suspicious activity without fear of retaliation, they’re far more likely to bring attention to those issues before they escalate even further. Business leaders need to create an environment where employees know they can speak up, encourage open communication, and ensure there are clear, confidential channels for reporting concerns.
3. Establish Clear Fraud Prevention Policies:
Clear anti-fraud policies are an essential component in preventing and detecting employee misconduct. Companies need clear policies that outline everyone’s responsibilities and create a system of checks and balances. As the bookkeeper’s case shows, a clear policy dividing financial duties would have prevented one person from having too much control and the ability to operate without fear of detection.
BE PROACTIVE ABOUT PREVENTING AND DETECTING FRAUD
Once you and your team are aware of fraud risks, it’s time to put real safeguards in place. Prevention measures can dramatically reduce the temptations and opportunities for employees to commit fraud. Here’s what you can do:
1. Strengthen Oversight.
The bookkeeper we investigated got away with fraud for so long because there was no oversight. Businesses serious about preventing fraud must regularly review their financial processes and transactions. Audits and independent reviews can catch issues early—before they spiral out of control.
2. Segregate Duties and Use Technology:
As we’ve made clear, fraud risks skyrocket when a financial process is controlled by a single person—no matter how long-serving or trusted—with no process to check that individual’s activities. Duties should be segregated, and work should be subject to review. To help spot potential problems, business owners can deploy technology to help flag unusual transactions. The bookkeeper we investigated may have been detected far earlier if the company had been using automated alerts to identify altered financial transactions. Technology can add an extra layer of security and catch what manual processes might miss.
3. Perform Unannounced Audits.
Unannounced audits keep everyone on their toes and can discourage potential fraudsters from attempting to scam their employers. In the case of the bookkeeper, a surprise audit could have uncovered her fraudulent activities before they got out of hand. Make unannounced audits a regular part of your financial processes.
START WITH ONE, ACHIEVABLE STEP
As a business owner or stakeholder, you have the power to prevent fraud in your organization. Relying on accidents or tips isn’t a strategy—proactive awareness and action are the keys to protecting your business from misconduct and the need to conduct full financial fraud investigations.
Prevention doesn’t have to be complicated. Start with one small step today: Review your internal controls. Look at who has access to your financial systems. Make sure no single person holds all the keys. Doing this can significantly reduce the risk of fraud and give you greater peace of mind.
Don’t wait for fraud to find you. Build awareness, strengthen your processes, and stay vigilant. Knowledge is your best defense.
For more information about how to prevent, detect, or investigate fraud, visit our practice page or contact us for a consultation and information on fraud awareness or financial fraud investigations.