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Take it from a Certified Fraud Examiner: You are Your First and Best Defense

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Fraud is everywhere. As the practice leader for Dixon Hughes Goodman’s Forensic, Litigation Support and Valuation Services, I get, on average, one call a week from someone who suspects a fraud in their organization. And by the time you suspect or discover it, you may have already experienced a financial loss.

Fortunately, there are some simple precautions you can take. Start by recognizing some tough truths about fraud and the people who commit it:

  1. Fraudsters don’t always look like criminals. If they did, you wouldn’t hire them. People who steal from their employers or clients look like you and me.
  2. Fraudsters don’t have rap sheets. Your pre-employment background checks would reveal if someone had been convicted of a crime. The typical fraudster has never been in legal trouble.
  3. The person who steals from you is likely to be a long-term, trusted employee. You’ve trusted them enough to give them access to financial information, company checks, petty cash or a company credit card.
  4. Fraud generally starts slowly. It begins when a good person gets into a bad spot and makes a bad decision.
  5. After you’ve discovered the fraud, it will make sense. Hindsight is always 20/20, and victims of fraud often tell me they had a hunch they ignored.

Good people may do bad things

So, what makes a good person do something bad? The formula is simple. It’s a bad experience plus a perceived opportunity. Good people find themselves in positions that seem untenable, such as debt, divorce or midlife crises. When someone in financial trouble has access to funds – and thinks he/ she can dip into those funds without getting caught – there’s an opportunity for fraud.

Understanding that decent people commit fraud is crucial to protecting your dealerships and its employees. Setting up appropriate safeguards not only protects you and your dealerships’ assets – it also protects a good person (in financial trouble) from doing something illegal.

As an employer, there's little you can do about the external forces impacting an employee. What you can do is minimize your risk by having proper controls in place.

An ounce of prevention

The most effective way to deal with occupational fraud is to deter it. The best defense is a good offense.

Don’t be afraid you’re going to create an atmosphere of distrust. Let your employees know you recognize fraud as a potential threat and that you’ve implemented safeguards to prevent and detect it. Being visible and hands-on goes a long way toward thwarting fraud.

There are a few simple things any business owner or manager can do to help prevent fraud:

  • Review your bank statements and the supporting documents including your canceled checks.
  • Establish an atmosphere of oversight. Let employees know someone is watching.
  • Have a written policy about fraud. Most employees want to play by the rules. But they have to know what the rules are.
  • Establish a sound audit trail. Friends and family members shouldn’t approve each other’s expense reports.
  • Physically safeguard confidential, sensitive documents. That’s just good business.
  • Restrict and oversee electronic access. Give access only to those who need it.
  • Segregation of duties. This is Internal Controls 101.
  • Be careful about vendor approval and vendor payment setup. Fake vendors are a serious problem. Use the technology readily available (such as Google and your state’s Secretary of State website) to check out the vendors you’re paying.
  • Implement anonymous reporting mechanisms. Make it safe for someone to report suspected fraud.
  • Consider job rotations and mandatory vacations.
  • Recognize the behaviors of an employee in potential trouble. An employee who seems overly protective of a client or customer could spell trouble.

Now, consider calling in a pro to conduct:

  • Fraud risk assessment. Someone who isn’t close to your business and your employees is ideal.
  • Fraud awareness training. It’s important for employees to know the why behind the internal controls they’re asked to implement. An outside expert can help explain the rationale.
  • Surprise investigations. The element of surprise is crucial to learning what’s happening behind the scenes. An unannounced, on-site review of controls will allow you to determine the true effectiveness of your internal control environment.

The Human Element

Internal controls aren’t enough to prevent fraud. A computer alone can’t monitor your cash flow. A human has to do that, and humans are fallible. Invest in educating your people about what constitutes fraud, how to detect it and what the penalties are. Make it tough for an employee to make a bad decision. People who think they’re going to get caught don’t commit fraud.

Every business owner or team leader wants a friendly workplace. But chumminess, plus access to finances, can lead to trouble. If Joe and Bob are best friends, and Joe has the authority to approve Bob’s expense reports, there’s potential for a problem or if Barbara is the controller and her husband Joe is the parts manager.

You want to trust your people, and you should. Ronald Reagan’s old adage about the former Soviet Union applies here: “Trust, but verify.” It’s perfectly reasonable – and good business – to check behind people to be sure your trust is well placed.

No excuses

I sometimes hear the rationale about why people don’t have or enforce internal controls. “It takes too much time,” or “It makes employees feel they're not trusted.” I tell them that internal controls can’t work if they’re not enforced. Again, hiring trustworthy employees is what you should be doing. But trust is not an internal control.

If you think enforcing controls impedes efficiency, you’ll hate to see what an embezzling employee does to productivity – and to your bottom line. Inherent in every internal control is an additional layer of time and effort added to an individual’s responsibilities. Nonetheless, it’s worth the time and effort.

I’ve seen the devastating effects of fraud. It’s more than the financial impact on your business. It’s tough to see a dealership owner or manager who has lost trust in someone he/she employed and cared for. It’s tough to see that same person questioning his/her own judgment. I’ve seen the shame and remorse on the part of employees who have committed fraud – those good people who made bad decisions.

When you implement fraud controls, you’re preserving your business and your personal relationships. Limit the opportunity, and you’ve limited your chances of being a victim.

Fraud is everywhere. But it doesn’t have to happen in your business.



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