Ways to Combat Occupational Fraud

In a recent BLR article, we discussed the idea of occupational fraud, which is a type of fraud committed by employees against employers. Occupational fraud causes billions of dollars of losses for US employers each year.

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Now let’s take a look at some of the ways employers can combat occupational fraud. From an HR standpoint, occupational fraud is something that hits home both directly and indirectly. It hits directly because it calls into question hiring processes that in theory (but perhaps not in reality) could have flushed out a fraudster before they joined. While that may not be true in many cases—it may have been impossible to predict—that doesn’t mean it won’t be questioned. Even if it’s not questioned, there’s still the issue of possible lawsuits, disciplinary actions, terminations, new recruitment, employee morale, etc. HR clearly has a vested interest in preventing occupational fraud.

It’s in the best interest of HR managers to work with others across the organization to minimize fraud risk. One of the biggest things HR can do is help to set up means for employees to anonymously tell the organization if they suspect fraud is happening somewhere; getting a tip is one of the means that this type of activity is discovered.

What Can Employers Do to Combat Occupational Fraud?

Employers can take steps to reduce their risk. There are some factors – known as the fraud triangle – that may influence employee behavior. First, there’s the issue of financial need or other motivation. Then there is rationalization. Then there is opportunity. Tackle any of these factors to reduce risk. For example:

  • Ensure employees feel valued and compensated fairly to minimize how much an employee may rationalize that they’re “owed” more as a means of justifying fraudulent behavior.
  • Minimize opportunities for fraud by having checks and balances in place for any area where there is risk. Have someone double checking expense claims, for example. Keep inventory and cash locked up and minimize who has access.
  • Conduct audits of any area where financial fraud or embezzlement may be a concern. Random audits are a way to check a process without having double the work every step of the way.
  • Watch out for red flags in situations or behavior. For example, if an employee seems overly financially stretched, he or she may be more likely to consider fraudulent behavior. (Note: being financially stretched may come from the employee’s debt and spending behavior, or from circumstances like divorce, just as easily as it could come from not making enough money to cover normal expenses.) Obviously not every person who is having financial difficulties will resort to occupational fraud; it’s simply a risk factor.
  • Give employees a means to report suspected fraudulent activity. Ensure there’s an option to remain anonymous to encourage reporting.

Unfortunately, once fraud occurs, it’s unlikely the organization will be reimbursed for their losses. So it’s important to note that reducing the risk of fraud occurring in the first place is the organization’s best bet to minimize the financial losses associated with it.