Antifraud programs and controls are put in place by a company to ensure management directives are carried out related to compliance with laws and regulations. Good antifraud programs and controls should focus on prevention, deterrence and detection of fraud related activities. Normally, there are three conditions that are present when fraud occurs: 1) incentive/pressure 2) opportunity and 3) attitude/rationalization. Having in place controls, such as those below, that reduce these conditions will reduce the risk of fraud occurring within your company.
Fraud prevention helps ensure that fraud does not occur. Having controls that provide no opportunity for fraud to occur or reducing pressures that can motivate a person to commit fraud are key. Some effective controls can include the following:
- Background checks on people prior to hiring them.
- Researching a future employee’s education, employment history and following up with their personal references.
- Physical security on items such as blank check stocks.
- Segregation of duties between employees that process accounts receivables from those who open the mail and make cash deposits.
- Segregation of duties between employees that process accounts payable from those who review, approve and sign checks.
Fraud deterrence modifies a person’s behavior to not commit fraud due to a fear of being punished. The threat of any consequences if a person is found to commit fraud is considered one of the strongest deterrents. Some of the effective controls can include the following:
- Having a zero-tolerance policy to fire and prosecute any perpetrators.
- Segregation of duties between employees who reconcile bank accounts from those who process accounts receivable and accounts payable.
- Informing employees that the company goes through annual audits and when auditors are on site.
- Segregation of duties between employees who reconcile balance sheet accounts from those who have access to the physical assets and liabilities.
Fraud detection is difficult because fraud involves concealment through falsification of records or other means. Some effective controls can include the following:
- Financial review by comparing financial performance between two periods or between budgets. Any anomalies can assist in uncovering fraud.
- Having customer incentives for reporting any suspicious activity to the company.
- Having an open-door policy or fraud hotline to allow employees to report any suspicious activity without the fear of retribution.
- Have periodic job rotations or having mandatory vacations for key employees over financial reporting. Having another employee perform the previous employee’s job could uncover suspicious activity.
Overall, we see that many of these controls can be effectively implemented for most companies, large or small. However, these controls can become more sophisticated depending upon the size of the company. We are here to help if you need any guidance with implementing antifraud controls within your company.
If you have questions, please contact your Henry+Horne advisor.
Patrick Herrera, CPA