Business owners spend lots of time on making sure that vendors don’t steal from them. But how much time do these companies spend assessing the risk of their own employees stealing from them?

The risk of internal fraud is so great, that fraud investigators estimate American companies lose $652 billion a year to fraud. As reported in the 2006 Report to the Nation on Occupational Fraud and Abuse, fraud investigators surveyed estimated that companies lose 5% of their income each year to internal fraud. And that 5% loss of revenue can add up quickly, putting even the strongest businesses in danger of insolvency.

The secret to ending financial fraud is the application of proactive fraud prevention techniques. Aggressive fraud prevention policies and procedures can save companies significant money in the long-term. So while companies may believe that the cost of fraud prevention is high, it is insignificant in comparison to the amount of money that can be lost each year to fraud.

One of the most common and most effective fraud prevention techniques is the creation of an anonymous fraud hotline. These hotlines are sometimes referred to as “reporting mechanisms” because they allow employees and third parties to report suspicions of fraud.

Teaching employees about fraud is also an effective fraud prevention technique because research has shown that employees are willing to be corporate watchdogs. It therefore makes sense to teach those employees about fraud, how it is commonly committed, and some of the warning signs. When employees know more about fraud, they are more likely to use the anonymous fraud hotline the company has established.

Proactive fraud prevention measures should focus on the proper authorization of transactions and the oversight of processes in a company. It’s important to make sure that employees are not exceeding their authority or otherwise initiating transactions that are not approved. The bottom line is that companies should create checks and balances that ensure that errors and frauds will be detected in a timely fashion.

A proactive fraud prevention program is best developed by an experienced fraud expert. Someone with a strong fraud examination background brings real-world experience to the table and is therefore often most qualified to help a company establish effective fraud prevention policies and procedures.

Effective fraud prevention policies and procedures focus on creating an anti-fraud atmosphere in which employees readily participate because they understand that fraud prevention is good business for the company and for them as individuals.

Implementing a full-blown fraud prevention program in your company is not
an easy task. But with the assistance of a qualified fraud investigator, you can create an effective anti-fraud initiative that will reap long-term rewards for your company.

Tracy L. Coenen, CPA, MBA, CFE is an author, fraud investigator, and entreprenuer at Sequence Inc. Forensic Accounting in Milwaukee and Chicago. She is the author of Essentials of Corporate Fraud, a book that guides executives, attorneys, and accountants through the topics of fraud detection, investigation, and prevention.