How Businesses Can Minimize the Risk of Fraud
May 8, 2023
Any business can be at risk of fraud, so it is essential to implement measures to protect your interests and those of your employees. Adopting best practices and implementing internal controls is the best way to achieve this.
You may say, "We are a solid business with honest employees. We would know if there was money missing. Even if there were fraud, we would catch it before it could impact our business."
In response, we would like to share a story about the Financial Services giant ING and its employee who embezzled nearly $8.5 million over four years. Due to a lack of internal controls, Nathan Mueller almost got away with it:
Mueller became part of ING when his company, ReliaStar, was acquired by ING. Mueller was part of a transition team, which created an opportunity for him to commit fraud.
With access to financial reporting, journal entries, and checks and wire payment processing, Mueller had unhindered access to ING's money. He was mistakenly given the authority to approve checks up to $250,000 and soon began taking advantage of this loophole.
Mueller's fraudulent activities didn't begin upon ING's acquisition of ReliaStar. It wasn't until three years at ING that he experienced a life-changing event that created pressure for him to embezzle money. His wife became pregnant, and he struggled to afford all their bills.
Mueller started small, requesting a $1,100 check written out to "Universal," his credit card company, under another employee's account. He then approved the check under his account. The accounting department issued all checks to Mueller's department, where they were to be forwarded to the appropriate recipients. Mueller took the $1,100 check and sent it to his credit card company, which credited it to his account.
Mueller replicated the process that summer, eventually paying off $88,000 in his debt using company money. Over the next four years, Mueller stole approximately $8 million from his company. Suspicions were not raised until his ex-wife, whom he divorced during this period, inquired about his extra income with Mueller's coworker. This led to an internal inquiry being launched and Mueller eventually being exposed.
How Does a Fraud Triangle Affect the Practice of Fraud Risk?
The Mueller case reveals numerous factors that typically lead to fraud within a business. This next section will discuss the three factors – known as the Fraud Triangle – that lead to business fraud. A fraud triangle consists of three elements that keep fraud thriving in a business, primarily when it's not controlled. These three factors are:
Let's explore these factors further to determine why a person would commit fraud:
Some people engage in fraud due to a shortage of revenue, personal financial problems, pressure from banks, etc. When channeled in the right way, pressure can lead to increased production. However, when channeled inappropriately, people can resort to irrational and illegal means to solve a problem. Here are some common examples of pressure leading to fraud:
- Divorce/Family problems – The pressure of divorce and other family problems often leads to fraudulent acts. While facing family challenges, people may resort to fraud to pay for mounting debts.
- Financial Difficulties – Financial difficulties can lead employees to engage in fraudulent acts to settle debts. Debt complicates financial management and limits purchasing power.
- Addiction – Gambling, Drug, and Alcohol addicts are constantly under pressure to get money to do what they love. Therefore, they may resort to illegal opportunities to obtain money.
- Medical Bills – The increase in the price of drugs and other health facilities has put ill people and their loved ones under pressure to meet financial needs for medical bills. Unfortunately, they may engage in fraudulent acts to help their sick loved ones or even help themselves.
Opportunity is the second factor in the fraud triangle. Pressure leads to impatience, which leads to immoral ways of solving a problem. Fraudulent opportunities present themselves when a business lacks the following:
- Improper Segregation of Duties – No individual should be allowed to start a financial transaction and finish it.
- Lack of Management Oversight/Lack of Fraud Education – All employees must undergo fraud education classes to minimize fraud risk.
This is the last element in the fraud triangle. Rationalization tells us how employees justify their actions to commit fraud. They usually don't see themselves as criminals. Instead, they try to justify their actions using statements such as:
- "Nobody will get hurt."
- "It is only temporary."
- "I am only going to borrow the money."
Internal Controls Recommendations and Their Benefits
Now that you know the basics of minimizing fraud in your business, let's discuss further steps to reduce your risk. Our number one recommendation is to implement Internal Controls, which systematically help minimize fraud risk in any business. Segregating duties through internal controls helps ensure a smooth flow of finance, the efficiency of operations, compliance with applicable laws, and achievement of a business's goals. Implementing Internal Controls also helps executives respond to unforeseen circumstances utilizing the following factors:
- Proper Authorization
- Segregation of Duties
- Independent Internal Audit Function
- Proper Documentation and Records
- Physical Control
- Regulatory Compliance and Risk Management
Nine Best Practices to Minimize Risk of Fraud
In addition to recognizing threats and implementing internal controls, businesses should also consider incorporating these best practices:
Organize Fraud Awareness Programs for Employees
Companies can control fraud by educating employees about fraud, the policies and rules guiding the business, and how to handle information regarding the business.
Monitor Your Data
Advancements in technology have increased the amount of information available online. Fraudsters have different hacks to unlock private information. In essence, businesses should be conscious of how they upload their information online. Monitoring your data protects your data from getting into the wrong person's possession.
Implement Company Policies on Confidentiality and Nondisclosure
Businesses should develop and implement confidentiality and privacy policies. Once adopted, employers should adequately inform employees about the confidential policies and information guiding business. The employee must sign and agree to keep confidential data secret even after leaving a company.
Hire the Right People
Companies should ensure that they thoroughly examine people before employing them as staff. This includes vetting employees obtained through a merger or takeover. Human resources should adequately document the background information of all paid workers.
Set Up a Whistleblower Hotline
Whistleblower hotlines offer a wide range of reporting capabilities. Through them, employees have a means of reporting any suspicious actions.
Recruit Knowledgeable Accounting Experts
Employing accounting experts can prevent accounting irregularities, financial losses, and theft. Business runs smoothly, and the chances of fraud are reduced.
Organize More Training Programs for Workers
Companies should go beyond educating employees about identifying fraud. They should also introduce measures to prevent and control fraud.
Regular Review of Accounts
Management should review the books to ensure there is no theft.
It should be part of a company's policy to promote their committed workers. Succession planning provides employees with many opportunities to improve their business and financial knowledge. Businesses are best served when they adopt a zero-tolerance policy for fraud and implement internal controls. By embracing proven practices, you can protect your business from fraud.
“Mike and Carl helped guide us through the process of our management acquisition and provided value-added service in every facet of the transaction. Also, when it came time to finding a financial partner for our business, we turned to them once again. They were consultants, as well as tax and audit CPAs, and added tremendous value to the process.”
Bob Brotzki CEO, Schneider Packaging Equipment Company, Inc.
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