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Here are the six steps you and your organization can take now to recognize and prevent employee dishonesty claims:

Step #1 – Create a Fraud Policy

Simply having a fraud policy in place raises fraud awareness among managers and establishes a hierarchy of responsibilities for the detection and investigation of wrongdoing.  There are several important provisions that fraud policies must include:

1. A statement making managers responsible for knowledge of the exposures and the symptoms of fraud in their department;

2. Guidelines for properly handling suspected theft to avoid charges of malicious prosecution, slander, libel and false imprisonment;

3. Assignment of responsibility for investigation, internal notification and communication, insurance claims, and coordination with law enforcement;

4. A written reporting procedure so that employees can confidentially report suspicious conduct to those responsible for investigations.

Step #2 – Establish Internal Controls

Internal controls are necessary to monitor the objectives of any organization.  Internal controls cover such diverse areas as human resources, manufacturing goals, accounting records, and compliance with government regulations.  In the opinion of many auditors, sound internal controls can prevent most occupational offenses.

But internal controls can provide only reasonable – not absolute – assurance that their company’s goals are being met.  Most internal control mechanisms can be defeated by one or more employees sufficiently motivated.  To maximize the effectiveness of internal controls three conditions are absolutely necessary:

1. Oversight and supervision of employees and their activities;

2. Careful division of employee responsibilities so that no one employee can handle a financial transaction from “cradle to grave.”;

3. Require countersignatures on all checks, as well as a separation of duties for sensitive transactions, such as purchasing inventory, writing checks and balancing accounts.

Step #3 – Obtain Periodic, Independent Audits

To assure objectivity, an outside CPA should perform both internal and external audits.  Some organizations will even audit the auditor to ensure he or she is not committing fraud.  Many organizations employ outside security consulting firms to test procedural controls and offer suggestions for their improvement.

Step #4 – Don’t Forget About Your Computer System Controls

It is critical to restrict access to sensitive transactions and information to only employees with legitimate need for such access.  This can be accomplished by:

1. Tracking who requests access to the network or sensitive transactions;

2. Ensuring that passwords are difficult to guess and changed frequently;

3. Install a “firewall” between the private corporate network and the internet or outside network;

4. Encrypting confidential information;

5. Using software that detects suspicious or threatening activity.

Step #5 – Take Appropriate Loss Prevention & Detection Measures

Because internal controls are not completely foolproof, especially when there is collusion, it is impossible to prevent employee dishonesty entirely.  But by taking these few simple steps, organizations can make it difficult and time-consuming for employees and others to defraud the organization.

1.      Establish standardized internal controls that provide both the consistency and uniformity throughout the organization;

2.      Conduct pre-employment checks;

3.      Educate employees on how strong ethics benefit the individual worker (i.e., avoid the financial impact on company profits, raises and promotions);

4.      Management should set an example of ethical behavior;

5.      Set a decisive policy to investigate and, where warranted, prosecute wrongdoing.

Step #6 – Completely Evaluate and Monitor the Adequacy of Your Employee Dishonesty Coverage

Even with all the above steps taken, occasionally any employee, or group of employees, can successfully defraud your company.  The last line of defense to prevent the financial impact of such events is a properly designed employee dishonesty policy.  Take a close look at coverage adequacy.  Not all employee dishonesty policies are alike, and there are many gaps that can exist if not properly designed.  For that reason we strongly recommend an annual review of these coverages in light of existing company exposures and make adjustments where necessary.

NAPLIA

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