How to Develop a Successful Fraud Prevention Program

We are pleased to offer the next entry to our White Nelson Diehl Evans 2017 Series on Fraud.  As a result of our firm’s experience in conducting fraud investigations and in assessing fraud risks for our clients, we have concluded that a successful fraud prevention program should include the following five key elements:

• Tone at the Top.  Top management must set an example of the highest levels of ethics, integrity and honesty.  If employees observe high-level officers conducting business in this fashion, such behavior is a strong deterrent to other employees from committing fraud or other unethical behavior.  Conversely, unethical behavior by top officers may create an “environment” that encourages employee fraud.

• Codes of Conduct and Ethical Standards.  The business or organization should adopt written codes of conduct and ethical standards.

• Fraud Prevention Manual.  The business or organization should have a Fraud Prevention Manual.  The manual should include disciplinary measures for violations, such as dismissal from the job, civil litigation to recover misappropriated funds and/or the referral of fraudulent activity to the district attorney for criminal prosecution.

• Strong Internal Controls and Procedures.  The business or organization must have strong internal control systems and procedures, where there is a proper segregation of duties between the custody of assets and those accounting for such assets, and where there are multiple personnel checking on the propriety of financial transactions.

• Continuous Monitoring of Financial Transactions.  There should be continuous monitoring of  financial transactions for the possible misappropriation of assets or other improper conduct.  In our experience, a successful program involves one or more of the following elements: 1) an internal audit function, 2) the use of fraud “hotlines”, whereby employees, vendors, customers, whistleblowers and/or informants can provide “tips” on suspicious activity and 3) the use of “data analytics” or “data mining” software to identify unusual trends or transactions in large computer databases.

In order for the program to be successful, high-level officers must “take ownership” of the program, communicate the program to employees via educational meetings or seminars and monitor the program for compliance.  If you want to discuss ways to help minimize the chance of fraud in your organization, contact your WNDE partner today.