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Fraud Prevention Techniques

Segregation of duties

In an ideal world, segregation of duties between different employees would ensure that the authorising of transactions, the making of payments, the accepting of delivery of the assets arising from the transactions and the recording of the transactions would be undertaken by different employees.

In many small and medium-sized enterprises strict segregation of duties will not be possible due to the limited number of employees in the organisation but this should not mean that the entity should not strive for as much segregation of duties within the transaction cycle as possible.

Good basic accounting controls

Basic accounting controls such as regular bank reconciliations, regular reconciliation of supplier balances to suppliers statements, regular preparation of control accounts, maintenance of a fixed asset register, regular stock counts, preparation of monthly accounts and constant management oversight play a significant role in reducing the instances of fraud and help to detect fraud in a timely manner when it does occur.

Physical controls

Implementation of good physical controls over access to assets is necessary in any organisation.
Rotation of duties

The ability of an employee to hide the fraudulent activity over an extended period of time increases the losses to the employer. Rotation of duties among employees on a regular basis will make it more difficult for the suspected fraudster to hide fraudulent activity.
Encourage whistle blowing by employees

Employers underestimate the difficulties that employees have in reporting suspected fraudulent activity by a fellow employee to management. This difficulty is increased where the suspected fraudster is a manager of employees who are aware of the activity. Businesses should consider making available a facility to employees where employees can report suspected fraudulent activity anonymously to a third party who will in turn inform the employer.
Oversight of branches
Entities can be particularly vulnerable to fraudulent activity at a branch level. Regular visits to branches by management, review of branch activities and monthly reporting of accounting information by branch to head office will assist in reducing the risk of fraud at the branch level.

Compulsory holidays
For most of us holidays cannot come around often enough. In the case of an employee who is committing a fraud, the taking of holidays may increase the possibility of the fraud coming to light and so they will be reluctant to take holidays. Make holidays compulsory for all staff.
Data is power
The digital revolution has created a new range of possibilities for fraud. Data in the wrong hands can be used to commit a fraud so it is imperative that data is protected and is not allowed to get into the wrong hands. Any steps to reduce the risk of fraud should include a data security audit. Among other matters a data security audit must look at data encryption policies, online security and online banking use.

The potential losses to a business arising from procurement fraud can be very significant over an extended period of time. In order to reduce the risk of procurement fraud consider some of the following:

Implementation of controls over all processes in the, purchases, creditors and payments cycle.

Proper due diligence for new suppliers combined with adequate authorisation of new suppliers and contracts.
Mandatory supplier tendering on a regular basis.
Regular comparison of costs to benchmarks and detailed investigation of departures from these benchmarks.
Robust cost control.

Procurement of professional and consultancy services require special attention as the absence of a physical product arising from the transaction makes control more difficult.

Fraud and related parties
Many frauds involve situations where a related party facilitates the committing of a fraud or gains from a fraud. Therefore there is merit in a regular examination of related party transactions for any evidence of fraud.

Particular attention should be given to the awarding of contracts to a related party or the purchase/sale of assets to a related party.

Ethical culture within the business entity
The business entity should strive to develop a culture of honesty and integrity within the organisation. It is likely that such a culture will reduce the instances of employee fraud.

To achieve this objective the organisation must lead by example in the manner in
which they treat employees, customers and suppliers.

A zero tolerance to fraud
Business must make it clear to all stakeholders that there is a zero tolerance to fraud and that all suspected fraud will be reported to the Garda.
Employee training

Training employees to be vigilant for instances of fraud can increase the awareness of fraud as a cost to the business. In addition such training can be used to make all employees aware of the organisations alertness to the potential for fraud loss which is likely to deter employees from committing fraud against their employer.
Monitoring of controls
Establish a system of monitoring controls that are in place. If a business fails to monitor compliance with standard procedures and controls it is very likely that the controls will become ineffective with the passage of time as individuals become aware that non compliance is not detected.
In conclusion remember that the war against fraud must be fought daily and it is a war that will never be won. You are striving for containment in your efforts.

For Further information, Call Owen Dunne (Senior Partner) on 01-802 5400
Email: owen@kdaaccountants.ie