how to prevent frauds in business essay

how to prevent frauds in business essay

Effective Strategies for Preventing Fraud in Business

1. Introduction to Fraud in Business

Do not rely on the audit team to find the fraud – the perception is that many of them are poor at detecting it and their approach leaves many frauds uncovered. Ensure that the budget is spent on preventing fraud rather than just detecting it. It is the job of the management team to prevent fraud rather than the job of the auditors to find it. The correlation between factors that lead to fraud and external audit are that businesses with a lack of controls, management misconceptions, and high levels of trust in employees tend to experience higher levels of fraud. This, combined with a large number of high-profile fraud cases which shared similar characteristics, shows that 58% of frauds are committed by employees and a significant proportion of frauds are committed by middle to senior management. Fraud is most likely perpetrated by the finance department, followed by the internal audit departments.

The costs of fraud extend beyond the potential loss of money – fraud also uses resources to resolve, can lower employee morale, and can damage your company’s reputation amongst clients and suppliers alike. If a person is in a position to commit fraud (for example, because they have authority over a process) then that person is in a position to take many different types of fraudulent action. The most common categories of fraud include fraudulent payments (including duplicate and erroneous payments), inflated expenses and payroll fraud, kickbacks and theft, and the most common types of fraud involve the creation of false documentation. Be warned, also, that fraudsters are not easily caught – 85% of fraudsters do not have any previous criminal history and only 6% have served a prison sentence. According to the Survey of Occupational Fraud and Abuse 2014, these findings are consistent with those for previous years. The costs of fraud to a business can be enormous.

2. Common Types of Business Fraud

Misappropriation of assets involves an employee using company resources for personal expenses. In businesses, employees use company technology and time to gamble online, shop, or have free time on the clock. The individuals who commit fraud also tend to pad their expense reports with false meals, flights, and hotel accommodations.

Misappropriation of Assets

Inventory theft is another common type of business fraud, and the employees who commit this offense usually start by stealing small items. Once they realize how easy it is to get away with it, the employee or employees begin to sell larger items on the black market and eventually leave the organization open to potential losses.

Inventory Theft

This form of fraud happens when an employee who has been entrusted to manage money within an organization misappropriates those funds and lies about the statements. In small businesses, embezzlement is one of the most common offenses, and people who commit fraud have often not committed a previous offense.


Corruption occurs when employees use influence and bribery to make personal gains at the expense of the business. These individuals take money under the table and trade favors and gifts for personal interest.


Accounting fraud involves employees purposely miscategorizing costs and profits to reduce the taxes owed by inflating the value of investments, thus presenting a sturdier financial statement. Common accounting fraud cases include using company credit cards for personal expenses and altering records to cover fake invoices.

Accounting Fraud

Before discussing how you can detect and prevent fraud within your organization, it is important to first become familiar with the common types of business fraud and some of the people who are likely to commit the offenses.

3. Key Strategies for Preventing Fraud

In any case, businesses that are unable to alter their hiring or other personnel policies may be forced to engage in more audits in order to prevent a significant amount of fraud. Note that these discussions assume that the company engages in a sufficient number of audits to change employee behavior. If a company does not do enough audits, workers are not deterred from committing fraud.

In addition, regular audits also provide evidence to the employees that the company is keeping track of their activities, which deters fraud. If employees know that the company regularly collects and examines the data on their job performance, some of the employees will not consider committing fraud in the first place. Different types of audits might be more or less effective at preventing fraud. For instance, independent audits can be more effective at preventing fraud because they are more credible.

Here are several key strategies for preventing fraud. Regular audits can be a particularly effective strategy. The basic argument is that the company can directly observe whether the employees are committing fraud or are obeying existing rules. In some cases, the results will be so clear that the companies will not have to install additional, more costly methods of preventing fraud. The knowledge that unscheduled audits are a possibility may be sufficient to alter some workers’ behavior.

In a similar vein, many anti-fraud measures attempt to increase the loyalty of current employees by such means as paying employees a higher wage or increasing the benefits of honest behavior. The idea is that it should be possible to stop a good amount of fraud without employing extensive anti-fraud methods through these and other personnel policies. Other important strategies for preventing fraud work by attempting to discourage potential criminals from acting because the expected benefits are reduced.

There are several different strategies that a company might pursue to prevent fraud from occurring within their organization. Some of these strategies involve changing hiring and other personnel policies. For instance, a common characteristic of people who commit fraud while working for a company is that they have experienced a recent traumatic event, such as a child who is in trouble with the law or catastrophic health problems. Consequently, it may be that firms will be able to effectively reduce fraud by providing better health insurance or financial advice to employees who have experienced a recent crisis.

4. Implementing a Fraud Prevention Program

The intent of the fraud prevention program is to design and implement internal controls which address these risks and prevent fraud from occurring. Parts of a fraud prevention program include developing a code of ethics, fraud detection procedures, fraud response and reporting procedures, and worker hiring and promotion strategies. Key decisions must also be made about what ratios and financial information to evaluate for indications of fraudulent activity and which audit functions should be used to evaluate them. The final decision is regarding which segments of the general population are most likely to behave in a fraudulent manner.

A sound fraud prevention program addresses several types of organizational risk: 1. Financial reporting risk – that frauds lead to inaccurate financial information. 2. Misappropriation of assets risk – that frauds by individuals within the organization decrease profits and the financial well-being of the organization. 3. Operational risk – that frauds can cause operational losses by diverting management’s attention from normal business operations and by causing reputational damage to the organization.

5. Case Studies and Real-World Examples

To this end, special observation and training are called for to teach discernment among all levels of management and staff. There are also accounting and auditing remedies for such behavior, ranging from unusual financial measures for tracking changes in reliance on earnings indicators and developing procedures and tests for identifying falsified financial statements. Such tracking may indicate the varying degree of misstatement. Short of due care and attention, the company may commit itself to public documents based on falsified information. To convey confidence, the market relies on banks, external auditors, analysts, internal auditors, credit rating agencies, and business press that monitor each company.

The case studies in this chapter provide a detailed look at a variety of characteristics associated with occupational fraud perpetrators, such as gender, job tenure, and level of authority. The case studies offer additional insight by illustrating specific fraud schemes and how they often occur in combination. The cases underscore the importance of management vigilance. For example, McCuddy appeared to be perceptive in identifying financial anomalies in achieve target in net income, but in reality they were only the “frauds of the day.” There are many ways one can steal from the employer, and similar acknowledgment must be exercised throughout management in order for it to have any real meaning. If a business wants to be assured against fraudulent financial reporting, the antidote lies in developing a culture of honesty, one that rewards honest behavior and instills a sense of well-being through ethical principles.

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