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How Businesses Can Minimize the Risk of Fraud

Any business can be at risk for 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 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 was finding it difficult 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 sent on to the appropriate recipients. Mueller took the $1,100 check and sent it to his credit card company, which credited it to his account. That summer, Mueller replicated the process, 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. In this next section, we 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:

  • Pressure
  • Opportunity
  • Rationalization

Let’s explore these factors further to determine why a person would commit fraud:

Pressure

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

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.

Rationalization

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, 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 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. 

Succession Planning

It should be part of a company’s policy to promote their committed workers. Succession planning provides employees with many opportunities to improve 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.

About Bowers & Company CPAs

Bowers & Company CPAs aims to offer helpful information to our clients and friends. Learn more about how we can help should you need accounting and business consulting services.

Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

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Bowers & Company CPAs - Accounting Services Firm in Syracuse and Watertown NY
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