January 26, 2022

An Effective Fraud Policy Can Reduce Corporate Embezzlement

By Frank Suponcic, Partner, Valuation, Forensic & Litigation Services

An Effective Fraud Policy Can Reduce Corporate Embezzlement Valuation, Forensic & Litigation Services

Don’t kid yourself. National statistics and our own firsthand experience indicate that internal fraud and employee embezzlement are not going away anytime soon.

So what’s the easiest step (and one of the least expensive) that a company or organization can implement to combat the hidden threat of employee misappropriation, theft and fraud?

Background and credit checks are important. Segregation of duties and proper internal controls are a given. Companies need management oversight and an effective anti-fraud tone at the top. Some say a forensic risk assessment can be costly. Bonding has a price tag. Fraud hotlines are a close second! That leaves…a written corporate fraud policy.

Companies that institute a written corporate fraud policy have lower occurrences of employee misconduct and reduce their overall risk of employee theft. And best of all, this is a relatively inexpensive fraud prevention tool that often is overlooked. Do you have one? Chances are, you do not.

A fraud policy is not a paragraph or page included in an employee handbook. It is not a conflict-of-interest policy, nor is it a document that is presented and signed by the new hire on the first day of employment, then placed in the employee’s HR folder, never to be seen again.

Rather, a fraud policy, which should cover every employee, is a stand-alone document that defines and describes fraud, but also identifies examples specific to each business. The document shares management’s thoughts on the topic, details various fraud prevention measures and emphasizes a genuine concern for deterring it. Additionally, it underscores the negative effect that such behavior has on the company’s morale, employee compensation and profitability.

Management’s response to those committing fraud should include:

  • Aggressive criminal prosecution or the filing of a civil suit
  • Employment termination
  • Complete restitution (including reimbursement for all outside legal and accounting costs)

A comprehensive fraud policy includes the steps that an employee should take if any fraud is suspected. The employee is encouraged to report employee misconduct to executive management or anonymously (by use of an identified fraud hotline number) to the company’s legal counsel, forensic CPA or other independent third party. If the employee feels uncomfortable with tying their name to such a report, they can remain anonymous.

Every effective fraud policy requires management and employee interaction. An annual face-to-face meeting, usually with an HR representative, is most effective. This meeting provides management the ability to once again reinforce the anti-fraud tone. In addition, it enables management to inquire as to an employee’s firsthand observations regarding any potential fraud or co-worker misconduct. The employee should be asked if they have committed any fraudulent acts. All responses should be documented.

Each year, the employee and employer’s representative should sign the fraud policy acknowledging receipt and understanding. The original should be kept in their personnel file, and the employee should be provided with a signed copy for their reference.

Having employees and management on the same page is valuable in every aspect of the business. Fraud prevention and detection begins the day an employee starts and should be reinforced every year thereafter. A properly drafted and annually executed fraud policy is a cost-effective and proven fraud deterrent.