Tone at the Top Drives Fraud Prevention

Posted on Jun 1, 2015

By Pete Miller, CPA, CFE

This is a great article from Entrepreneur.com that, in a roundabout way, focuses on tone at the top as a fraud prevention technique. I am a big believer that a strong and positive tone at the top can be a business’s most effective fraud prevention tool. Strong leaders who not only have but also profess a business philosophy and demand that their teams share that philosophy, will see positive operational results as well as have a leg up on fraud prevention.

This article discusses four ways to protect your business against employee fraud and theft. These will not be the first four things you would think of in protecting your business from fraud – reconcile bank accounts, lock up and regularly count your inventory, etc. – but these are nearly universal techniques that any business can implement and see positive results.

1. Establish a code of conduct. This is the written incarnation of what I described as an owner’s professing of his/her business philosophy, and it’s a great tool. This makes it very clear what will and will not be tolerated. Having a written code of conduct and periodic ethics trainings provide ownership and executive management the opportunity to make certain that employees have no excuse for unacceptable behavior. Not only is it professed, but it is written down and actively taught.

2. Set up organizational checks and balances. This is the tried and true concept of segregation of duties. A lot of businesses could probably get by with fewer resources in accounting and finance functions, and some do. However, the companies that fulfill their total potential typically have sufficient accounting and finance resources to provide rich accounting information and support a healthy amount of segregation of duties. Since this kind of commitment involves hiring decisions, it has to come from the top.

3. Institute policies and procedures – trust but verify. Effective leaders who understand and believe in adequate internal controls will utilize a trust-but-verify approach. Even though we may have a code of conduct that everyone learns, we are still going to check up on how people are performing against that code. For those owners who aren’t as forthright with their approach to business, a trust-but-verify approach could be met with some skepticism and confusion. However, for those strong leaders who exhibit an exemplary tone at the top, policies, procedures, checks and balances are just another expected part of the business process. Appreciation for controls at the top begets appreciation for controls throughout and therefore a lower likelihood of fraud. Disregard for controls and process is fertile ground for fraud.

4. Watch employees’ behavior. Fraud theory is centered on a concept called the Fraud Triangle. This theory states that, in order for a fraud to take place, three elements must be in place: motivation, rationalization, and opportunity. Fraud prevention theory suggests that if you can cut off one or more of these elements, a fraud will not be possible or at least not as probable. Watching the behavior of your employees is key to understanding what may be motivating them. Strong leaders will make sure they become aware of what is going on in their employees’ lives. Maybe they have kids going into college, an ailing parent, or a family crisis of some sort. All of these things provide motivation for employees to turn to fraud. An owner/executive who actively watches for these things and works with employees to help them out, is clearly demonstrating a sound tone at the top.

Like I said, these four things may not be the first four fraud prevention techniques you would think of. They are very powerful though, and organizations that have these kinds of prevention techniques don’t have to rely as heavily on costly and time-consuming detective techniques.

© Clark Nuber PS and Focus on Fraud, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

Posted by:

Media Contact

Melissa Takade
Director of Marketing
Clark Nuber
Phone: 425-454-4919
Contact Melissa

Blog Archives

  • 2019
  • 2018
  • 2017
  • 2016
  • 2015
  • 2014
  • 2013