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Mitigate risk of fraud in the workplace

Companies with fewer than 100 employees have a median loss from workplace fraud of $150,000, while companies with greater than 10,000 employees have a median loss of less than $140,000. These numbers are shockingly high. Here are the eight most effective tools that should be considered for adoption in the new year to minimize companies’ risk of fraud:

Establish effective policies and programs

The foundation of any prevention program is an effective compliance and ethics program. To be effective, the policies must clearly set forth the company’s expectations and standards for employee conduct. Further, a company must train its employees on the policies. These programs must have a mechanism for anonymous reporting, and any issues raised need to be promptly investigated and addressed appropriately once detected.

Start at the top

One of the most important – and often overlooked – aspects of any compliance and ethics program is leadership from the top. Company leaders must set the standard and live by those standards on a day-to-day basis. Make sure the highest-level executives lead by example and take part in communicating the importance of these control measures.

Implement segregation of duties

It is essential to implement effective internal controls to prevent opportunities for fraudulent conduct. One of the most effective internal controls is segregation of duties.

This concept involves the separation of financial transaction tasks among different employees. For example, when purchasing goods for the HR department, one employee should initiate the request for the goods, a separate managerial employee should approve the request, a third employee should execute the purchase with the vendor, and a fourth employee should receive the goods, confirm the quantity and quality, and deliver the items to the employee who requested them. Smaller HR departments can set up checks and balances with another department, such as legal or finance.

Consider competitive bidding

Insist on competitive bidding for goods and services every three to five years. This doesn’t necessarily necessitate changing providers. It confirms that the company is getting the most value for its purchases and casts a fresh light on relationships that could be susceptible to lax oversight or malfeasance.

Launch random audits

A company should implement some type of random audits to confirm the validity of transactions and purchases. With respect to expense reports, this sometimes entails verifying actual receipts used to support an expense or comparing expenses among all employees to see if one person seems to submit expense reports consistently higher than other employees for similar business expenses. Irregularities don’t necessarily indicate fraud, but may be a justification for a deeper inquiry.

Involve the use of analytics

One advanced auditing method involves the use of data analytics to spot outliers. For example, when trying to identify ghost employees, it may be helpful to use a data analytics program to cross-check employee bank account information. Programs can quickly identify duplicate banking information shared by employees with different names, which may indicate possible ghost employees. Data analytic programs can also be used to check for irregular invoices.

First line of defense: ‘The watchers’

HR should always be on the lookout for warning signs of potential fraud. These often include such things as employees who never take time off or who refuse to let other employees perform their duties (as this could indicate someone fearful that their fraud will be discovered). Other warning signs include consistently being over budget for items that were previously within budget, and employees who oppose utilizing competitive bids for goods and services. In general, the best fraud prevention practices typically involve some form of “trust but verify.”

Watch the watchmen

The HR department is not immune from workplace schemes to defraud the company. One of the most common payroll frauds involves setting up “ghost employees.” With the growth of work-from-home policies, it may not be unusual to have employees that no one has met in person, and thus such a scam may be more easily pulled off. Therefore, executives should also “trust but verify” the HR department.


Every company should take affirmative steps to prevent fraud by putting controls and polices in place to detect and stop potential fraud. If you have questions regarding best practices for preventing or detecting workplace fraud, reach out to an attorney.

 Stephen Scott is a partner in the Portland office of Fisher Phillips.

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