Identifying and Preventing Fraud

Posted on January 8th, 2018

Fraud Prevention

Fraud is a terrifying thought to a business owner. You, like most people, probably think “It can’t happen to me.” However, according to the Association of Certified Fraud Examiners, privately-owned businesses and nonprofit organizations comprise nearly half the cases of occupational fraud.1 It’s more common than you thought! Proactively identifying and preventing fraud can seem like a daunting task, but it can be relatively easy. We’ve come up with three simple steps you can take to ensure your business is protected.

  1. Applicant Screenings
  2. Company Policies and Controls
  3. Team Fraud Education

1. Applicant Screenings

Preventing fraud starts with—you guessed it—hiring employees! Running background checks before hiring people seems like an obvious step, but a miniscule fraction of California-based small businesses actually take the time to do it.2 Although paying for a background check can be expensive and unnecessary for all positions, we recommend it for higher-level positions, especially those that provide employee access to credit cards, financial information, personnel files, or other confidential information. To learn more about background checks, including whether your company is authorized to request them from applicants, check out the California Department of Justice’s website.

Although background checks easily illuminate an applicant’s criminal history, predicting the future behavior of an applicant isn’t so simple. Did you know that roughly 88% of occupational fraudsters are first-time offenders with clean employment histories?3 With that in mind, take the time to get to know a candidate’s character. Trust us—it can make a huge difference. Although you may be facing pressure to quickly fill an open position, we recommend slowing down the hiring process to allow time for multiple interviews and in-depth reference checks. After all, you should be sure your applicant is the right fit for the position!

2. Company Policies and Controls

One of the most important steps to establishing companywide fraud prevention is implementing and enforcing policies and controls. Clearly explaining the consequences for unethical behavior in a company policy is a great way to deter employees from acting in the first place. Some companies even set up whistleblower hotlines that allow employees to speak up when they see wrongdoing. Although they can be helpful in identifying fraud, whistleblower policies should be used with caution due to the possibility of false reports.

Controls are another integral tool in preventing fraud, and they can double as a review process to ensure accuracy. A few financial controls we recommend having in place are duty segregation, balance sheet account reconciliations, employee cross-training, and employee expense approvals. We will dive deeper into this subject in our upcoming post on Financial Controls.

3. Team Fraud Education

Educating your employees on how to identify and prevent fraud is key to establishing a fraud-free work environment. Try conducting monthly or quarterly meetings with fraud quizzes or other knowledge-based games; they’re an interactive way to educate your team, and they can double as a team-building exercise. If you’re at a loss for ideas, take a look at the fun and informative quizzes published by the Journal of Accountancy!

Once your team is taught to be on the lookout for key fraud indicators, you’ll have more eyes to watch for potential wrongdoing. This awareness works twofold, as it can also prevent employees from acting on temptations to commit fraud.

If you suspect an employee of fraudulent activity, DON’T take action right away! If you fire the employee quickly, it is less likely you will be able to gather sufficient evidence to document his or her crimes. Instead, restrict the employee’s access to company data while investigation is underway. You can outsource a forensic accounting team to assist with the investigation process.

If you’re already employing these methods in your company, here’s a virtual high five! If you’re not, we’re happy to give you pointers on implementing these processes. Feel free to leave a comment if you have a question. We’d also love to hear if you have more tips on fraud prevention and identification!


  1. Association of Certified Fraud Examiners, 2016 Report to the Nations.
  2. Ibid.
  3. Ibid.

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