As the business environment becomes tougher and employers cut back on expenses, they often leave gaps in their internal controls that end up costing them much more than they realize.  Often entrepreneurs think that occupational fraud is something that rarely happens and a risk that can be assumed in tough times; not realizing that almost all companies will become a victim of this activity at least once in its existence.  It is not however, just a cost of doing business.  Understanding the elements of occupational fraud can assist business owners in preventing the theft from happening.

Perpetrators of fraud need three elements to be motivated to commit the crime; Pressure, Opportunity and Justification. 

Pressure can come from a variety of factors

·         Spousal job loss

·         Social or status issues

·         Different  monetary issues

·         Addiction

·         Physiological issues

Any and all of these things can and do compel people to go against their values and consider committing a crime.  In a typical occupational fraud case, this activity begins and accelerates before the crime occurs, often as long as nine months before, and is the first behavior to taper off as the fraud happens.  Knowing your people and being aware of their challenges may help you identify and ward off behavior that could turn negative.

Opportunity is the single biggest action item for businesses to address in this process.  If internal controls are lacking and oversight ignored, the risk of loss multiplies.  The five most effective things you can do to reduce the risk of fraud are:

·         Conduct surprise audits

·         Rotate jobs and enforce mandatory vacation

·         Deliver a way for employees to report fraud they observe, such as a Hotline

·         Communicate to employees that the company supports efforts to uncover fraud and no retaliation will come from reporting suspected fraud

·         Fraud training for executives

The owners’ antennae should rise up and investigate when an employee claims that it will save the company money if an employee works through vacation or that training a person to do what they do will only waste time and money.  You may already have a problem.  In increase in identifying opportunity also occurs as long as nine months before the fraud actually begins.

Finally, justification is the last step.  When an employee feels the pressure and sees the opportunity to steal, there still is this inconvenient moral issue to overcome.  Justification occurs when the employee feels that the company has wronged them in some way, or that the company condones the behavior by the actions of the executives and owners of the company.  An entitlement may occur over a lost promotion or a lower than expected raise, or from management behavior that lavishly spends money while cutting back staff and salaries, or even by owners telling employees not to refund customers money unless the customer demands it.  Owners may instruct employees to keep duplicate payments or unclaimed credits from customers and become shocked when employees treat the company the same way.

There are many factors contributing to fraud you cannot control.  People under pressure to commit fraud, who have justified it in their own mind, still need the opportunity to complete the act.  Preventing opportunity need not be costly, but preventing them may cost you the company.