Prevent Fraud And Increase The Bottom Line with These Three Steps

Across the globe organizations are forced to preserve limited resources, work with tighter budgets and somehow produce profits that are as realistic as Freddy Kruger presenting the Mickey Mouse Club.

The resulting crunch and pressure on employees combines with the global financial situation (with very deep individual impact) and unrealistic corporate expectations to form the perfect storm – for fraud.

I know the analogy for “perfect storms” has lost favor, but that does not dimish the reality that many organizations are and will continue to experience. This storm will crush organizations with the speed and randomness similar to Godzilla’s stomp through Tokyo.

The reality is clear: fraud is thriving in today’s turbulent economic climate. The Association of Certified Fraud Examiners (ACFE) 2008 Report to the Nation confirms this revealing that in 2008 $994 billion was lost to fraudulent activities..

To put this in perspective:

Dear Santa,

I want eight International Space Stations and fifty – yes, fifty — Space Shuttles. I plan to launch each shuttle 275 times  (since it only costs a mere $450,000,000).

P.S. The costs for this “gift” is less than the money wasted through fraudulent activities in 2008.

Silly, right?

Sadly, this is more reality than fiction. Consider the recent headlines: Baltimore mayor convicted on fraud charge, Fla. lawyer charged with $1B investment fraud Death Sentence for ₤35m Fraud Woman.The challenge we face is that this amount of fraud is only beginning. But it’s not too late to take actions now to weather this (and future) fraud storm(s) and come out the other side intact.

Want to head off fraud and improve the bottom line?

The time to act is now.

Prevention is possible and relatively simple to implement. Over the course of the next year, I am going to share insights and simple practices for a successful, proactive and achievable approach to fraud prevention.

The Flapping Wings of Fraud

Organizations impacted by fraud experience far-reaching effects, sometimes distressing the local community and even the world economy. Edward Lorenz’s butterfly effect is extremely relevant to fraud when taken in context of Bear Stearns, Lehman Brothers or even Bernie Madoff .

What may seem like a small indiscretion — the kind that causes no harm to any person — could actually be contributing to some thing much larger.

From tiny acorns massive oak trees grow. Left unattended that acorn will grow and grow.

Just like acorns, fraud thrives until someone takes action and removes the seed.

The key is to prevent the seed from germinating. This, in essence, changes the flap of the butterfly’s wings.

Understanding Fraud Leads to Effective Prevention

Fraud is the intentional or deliberate misrepresentation or concealment of material facts to deprive another of property or money.

Three elements must be present in order for fraud to occur:

• Pressure/Motive
• Opportunity
• Rationalization

Removing just one of these factors reduces the likelihood of fraud and increases the opportunity to improve the bottom line.

Reducing Fraud: With Half the Budget and Half the Team

No not mission impossible! The following three simple steps allow any organization to build a stronger and more profitable future no matter how limited the resources.

Step 1: Elimination Pressure/Motive

Employees who are sufficiently challenged, rewarded and cared about are more likely to stay with an organization and contribute to its long-term success.

Short term gains through cutting incentives and setting unrealistic goals will not contribute to the long-term organizational success. Associate turnover increases – which actually increases expenses (hiring new people is costly and labor intensive). More, this creates feelings of hardship and negativity that ultimately encourage fraud.

The first step is to actively reduce the pressure and motives for fraud through improved and consistent communication. We will work together on this in the coming year — but start today by asking questions, listening to the answers and engaging often.

Step 2: Elimination of Rationalization

When fraud occurs the perpetrator always has an interesting explanation.

Associates who steal client information often justify their actions with the falsehood that the organization will not be hurt significantly because they only took a small amount of information. They may even convince themselves that they are entitled to that money because the organization has them doing the work of three people and not increased their salary accordingly.

They further rationalize that the victim will not suffer financial loss as someone else will cover the costs.

While this can be a bit more involved, get started by stepping back and consider the culture of the organization: is a change in order?

Step 3: Eliminate Opportunity

What do employees do and how are they doing it?

In the coming year, we will explore common practices that also help reduce fraud, like segregation of duties and job rotation. A benefit to consider of these and other actions is the ability to increase the knowledge of associates and connect them back to the consequences of their actions. (Michael’s book, Into the Breach, nails this – and is a required read for anyone who wants to really make some changes in 2010).

Fraud occurs where oversight or accountability is lacking. Fostering a culture of openness and accountability helps prevent fraud – and actually increases long-term profitability.

Challenge For the New Year

As most people disengage for a few weeks, the time is right to consider fraud prevention for next year.

Start simple: between now and the New Year, modify just one behavior within the organization.

Take the first step towards creating a positive environment, which is more resilient to fraud. ‘Tis the season for giving — no better gift (in business) than the gift of hope for a long and profitable future.

Share your ideas and suggestions for the one thing you will change in the comments.

Working together, we can all make a difference!