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Fraud: honesty is the best policy

Trustworthy staff are the key to preventing fraud

Written by Simon Bevan

Accountancy Age, 10 Jul 2008
I have been trying to draw attention to the recent increase in fraud. This has led to the obvious question how do we prevent fraud? Unfortunately, if you are going to trade, employ and purchase you cannot prevent fraud. I could suggest measures to really tighten up your accounts payable procedures but it would take 90 days to pay suppliers who will in turn increase their price. The cost of fraud prevention has to be balanced against savings and the ability to be ‘fleet-footed’ in your business dealings.

What you can do is put trip wires in place so that you know within weeks, not months, that you have been defrauded.

You can also reduce your risk profile. This is analogous to the purchase of a domestic house: rather than location, location, location think recruitment, recruitment, recruitment. If you only recruit honest people, no matter how poor your control environment, you will never suffer internal fraud (57% of all reported fraud). If you recruit dishonest staff, no matter how fantastic your control environment, you will always be defrauded.

It is simplistic and not helpful to say only recruit honest staff without expanding on this point. Organisation need to take a risk-based approach to the due diligence they carry out prior to recruitment. You may decide that the individuals who expose you to the most risk are the managing and finance directors; and heads of procurement, marketing and IT. You need to carry out more due diligence for these positions than for other members of staff. Disturbingly, I see an inverse relationship between pre-employment checks and seniority. There will be fewer background checks on recruiting a managing director than the receptionist. Obviously a dishonest managing director can expose you to a much greater fraud risk than a dishonest receptionist.

Many people do not have faith in written references. Some employers are afraid of the perceived litigation risk of giving an adverse reference. Interestingly, I have not heard of anyone being sued for an adverse reference. But I have heard of employers being litigated against for bland references where an employee has gone on to defraud their next employer.

Don’t concentrate on designing out fraud, concentrate on having a better fraud-risk profile than your competitors.

Simon Bevan is a partner at BDO Stoy Hayward