Practical Fraud Prevention Strategies – Part 2 in a series By Glen Moulton, Sole Proprietor of The Fraud Triangle Forensic Services
In the first article of the series, I said that that a fundamental building block of an organisation’s vulnerability to fraud is that executives very often refuse to accept that fraud will happen in their organisation. Hopefully, last week’s article debunked that idea.
Another important factor is that, for Fraud Prevention strategies to be effective, employers must understand why employees commit fraud. This understanding assists in assessing the fraud risk facing the organisation and the implementation of appropriate measures to combat those risks. In an article, Joseph T. Wells, founder and Chairman of the Board of Directors of the Association of Certified Fraud Examiners, discusses two studies on workplace fraud. The first is by Donald R Cressey (1940’s) and the second by Hollinger and Clark (1970’s). Cressey, after interviewing 200 convicted fraudsters, found that the majority had committed fraud to meet their financial obligations. Hollinger and Clark established that one third of the 12 000 employees interviewed admitted to having stolen from their employer and hypothesised that motivation was key. They also indicated that opportunity and the ability to rationalise the crimes were also vital factors. The principle that can be distilled from both studies and from traditional criminological theories is that fraud is perpetrated where motive and opportunity are present.
When the employee is also able to rationalise his behaviour as something other than a crime, a fertile fraud breeding ground is created.
Accordingly, all fraud prevention strategies should, at a minimum, be designed to:
- Identify and limit the opportunity to commit fraud;
- Control the issues that affect employee motivation;
- Reduce the ability of the employee to rationalise his behaviour as acceptable;
- Facilitate effective response to reported instances of fraud
A world-class fraud prevention strategy should therefore include the following:
- Fraud risk review;
- Fraud Awareness Training;
- Fraud Hotline;
- Data Analysis;
- Fraud Response Plans;
As no Prevention Strategy is ever foolproof, an effective investigation capability is of utmost importance as it reduces the potential for loss, increases the prospect of recovery and acts as a deterrent. Over the next few weeks we will consider the various elements of a Prevention Strategy in more detail.