Best Practices to Prevent Internal Fraud and Embezzlement

While companies increase focus on external risks by enhancing regulatory compliance, anti-corruption policies, and cybersecurity, they must not lose sight of internal risks, including internal fraud and embezzlement. The Association of Fraud Examiners reports that organizations lose an average of 5% of revenue to employee fraud and abuse each year and that a typical fraud scheme lasts 12 months before it is ever detected. Implementing and enforcing a comprehensive anti-fraud policy is key to combatting employee fraud against the company. The following practices are often recommended as part of broader anti-corruption and compliance programs, but they can also be implemented by employers to mitigate against the risk of internal fraud and embezzlement.   

1. Regularly Update and Enforce Appropriate Policies

Developing appropriate policies is critical. However, consistently evaluating, updating, and enforcing these policies is equally important. With the COVID-19 pandemic, businesses have faced new challenges. Many companies shifted to a remote workforce which made it difficult for employers to monitor employee activity or enforce policies that may no longer be practical in the new work environment. Employers can minimize the risk of internal fraud and embezzlement by adjusting their policies where appropriate to meet the needs of a remote workforce. Additionally, employers should provide adequate and routine training to all employees to ensure that they understand and follow the company policies. Finally, employers can deter employee fraud and embezzlement by consistently enforcing the policies.

2. Limit Access to Financial Information

Access to financial information should be limited to the employees who need the information to perform their job duties. The employees should each have unique access credentials so that employers can review records of who accessed the information. In addition, employers should conduct periodic and unannounced audits.

3. Add Additional Employees to Financial Activities

There is a dichotomy to securing financial information that should be balanced. As discussed above, employee access to financial information should be limited. However, embezzlement is easier to hide if there is only one employee performing a particular financial task. Delegating financial tasks to at least two employees will foster accountability and minimize the risk of internal fraud and embezzlement.   

4. Ensure Employees Feel Comfortable Reporting Suspicious Behavior

Ensuring that employees have a way to report suspicious activity without fear of retaliation is critical. Otherwise, the benefit of adding employees to financial tasks could be lost. One way employers can help employees feel more comfortable is to implement an anonymous reporting system. Employers should verify that employees understand the process of reporting suspicious activity and are not subjected to retaliation if they are ever identified as a reporting employee.  

5. Create and Maintain a Rewarding Work Culture

A positive work culture minimizes fraud and increases employee productivity. There are many ways employers can foster a positive work environment. However, it is especially important for employers to clearly define expectations and company values and to communicate them to the employees. Employers can also foster a positive work environment by recognizing employees for achievements and offering career advancement opportunities.

By implementing these practices as part of a company’s anti-fraud strategy and remaining vigilant, employers can minimize the internal risks associated with employee fraud and embezzlement.

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