Practical Advice for Mitigating the Risk of Occupational Fraud

By Emily Paszkowski, CPA, CFE, Shareholder, Hungerford

Imagine discovering that your sales manager has used the company credit card for a $200 personal dinner. As a business owner, this situation may force you to make a difficult personnel decision. While it’s easy to think such incidents are inevitable regardless of company policies, consider instead whether this could be a valuable moment to enhance your business’s financial safeguards against occupational fraud.

Although you may not be able to control every factor that leads someone to commit fraud, you do have the ability to make it much harder for these incidents to occur. By proactively adjusting your internal processes, you can help prevent fraud and protect your business assets.

Below are five practical steps you can take to reduce the risk of fraud within your organization.

Create, Execute and Follow Operating Agreements

An operating agreement is an essential document when starting a business. One especially important section should cover access to financial information. Partnerships often start with excitement and trust, making this the optimal time to clarify each owner’s roles and responsibilities in writing.

The agreement should detail who oversees finances and how records are shared. It’s wise to ensure that no single individual has exclusive control over financial records.

Additionally, having more than one owner authorized to manage bank accounts and clearly documenting procedures for opening or closing accounts can strengthen your business’s financial controls.

By thoroughly addressing each person’s responsibilities and rights, you help reduce risk and provide clear guidelines should any disagreements arise in the future.

Develop a Code of Conduct

The behavior of employees is shaped by the example set by leadership. Establishing a code of conduct allows you to formally communicate your expectations for professionalism and integrity in the workplace.

This document also makes it clear which behaviors are unacceptable and may result in disciplinary action or termination.

By setting a strong example and maintaining clear standards, you build a culture that discourages misconduct and protects your business.

Reduce Risk Before You Hire

Before bringing a new employee onto your team, consider conducting a background check. While the cost may seem unnecessary — especially if previous checks have revealed no issues — investing in due diligence can help you avoid significant losses later.

For example, we assisted a client who had to let an employee go due to theft. Unfortunately, the organization did not perform a background check at the time of hiring. An investigation later revealed the individual had a history of similar behavior at previous jobs.

Taking the simple step of ordering a background check could have prevented the incident and saved valuable time and resources.

Implement Segregation of Duties

In managing your company’s finances, it is important that not just one person is responsible for all the “keys to the kingdom.” Segregation of duties means dividing tasks so that more than one person is involved in handling financial responsibilities.

For example, if you have an employee who is authorized to sign checks and enter vendor invoices for payment, make sure another trusted individual — such as yourself or another staff member — reviews bank statements and performs a monthly reconciliation. Reconciliation involves comparing your company’s accounting records with your bank statements to verify that balances and transactions match.

This process provides an opportunity to ask questions about unexpected or unauthorized transactions and correct any mistakes. Additionally, knowing that financial activities are routinely reviewed often discourages inappropriate actions.

Monitor Financial Statements

Oversight and segregation of duties are not about micromanaging employees but about protecting your business by having an extra layer of review.

Developing budgets and reviewing differences when actual spending or income does not match the budget allows you to confirm that recorded financial information reflects what is happening in day-to-day operations.

You can also ask team members about specific transactions or account balances to reinforce that financial activity is being monitored.

Make it a habit to review your financial statements and bank activity regularly. The more often you do so, the easier it will be to notice patterns and identify anything unusual.

Detect Fraud Early to Protect Your Business

It’s important to implement a culture of integrity to discourage employees from committing fraud.

Never assume “it can’t happen here.” Let’s talk about reviewing your financial controls to protect your assets before it’s too late.