Last month, the first column in this series introduced the topic of occupational fraud and its potential costs to electrical contractors. This month, you’ll find specific suggestions to help you minimize the risk of being victimized.
Conditions conducive to fraud
Common indicators of an environment conducive to fraud are poor internal controls; collusion between employees and third parties (including vendors, bankers and customers); management override of existing controls; and operating in a high-risk industry. Victims of fraud often ignore red flags, and relatively few employers file civil actions for recovery. In one survey, one-fourth of employers retained the employees who defrauded them.
An internal control is a policy, procedure or management action that directs em-ployees and safeguards company assets. The Institute of Internal Auditors (IIA) specifies five objectives of internal con-trols in its standards:
• Reliability and integrity of information
• Management compliance with company policies, plans and procedures and government laws and regulations
• Safeguarding assets
• Effective and efficient operations
• Accomplishment of established goals and objectives
Include three components in your internal control system: First, require all transactions to be properly authorized and entered into your records. Second, restrict company asset access to a limited number of people. Third, maintain an auditing system to regularly reconcile or compare accounting records to underlying assets.
Rules and procedures
Understand the culture of your own company. Conflicts between your formal rules and procedures and how they are implemented creates a perception of unfairness that puts you at risk of deception. Your policies and rules must be legally enforceable, clear, fair and easily understood. Managers and supervisors must enforce the system you put in place.
Have layoffs increased the work remaining employees must perform without additional compensation? Are rewards (such as bonuses) distributed fairly? Do employees feel valued? The mere perception of unfairness can drive employees to even the score, so ask for feedback frequently from people at all levels, or hire a consultant who can root out underlying issues.
Lead by example
If you want your employees to be honest, your leadership must set the example. If managers are rewarded for results achieved by cutting corners, or the owner is looting the company and keeping offshore accounts to avoid taxes, employees will notice and justify their own acts of dishonesty. The ethical standard comes from the top. Paying your suppliers on time and treating your employees and customers fairly are parameters that define what is acceptable and influences stakeholder perceptions.
It is equally important to defend your company against attack. If you retain unscrupulous employees and fail to prosecute those who steal from you, you have established the slippery slope.
Update your insurance coverage to include insurable crimes, such as theft, vandalism, acts against other people and fraud. Employee-related liability coverage has changed over time, so ensure you understand the definitions and limits of coverage. For example, embezzlement relates to assets that are already in the custody of the thief.
Review your security procedures, including physical barriers, alarm systems, locks and safes. Limit access to your facilities (especially after work hours), and verify the security procedures on projects before beginning work.
Global positioning system (GPS) tracking on vehicles and cell phones enables you to monitor when and where assets are being used, and it enables you to shut down equipment after work hours. Reconcile tool-tracking systems and other inventory periodically with the physical items. Analyze replacement costs for small tools and maintenance records for vehicles and equipment, and be on the lookout for slippage or waste that is not being recorded.
Duty segregation, especially for financial management, provides checks and balances for transactions as well as an audit trail. Sequential numbering systems ensure electronic and paper documents are tracked and that there are no purchase order duplications or checks issued to nonexistent vendors or employees. Timekeeping systems using biometrics (e.g., fingerprints or retinal scans) and productivity goals can reduce time theft.
Occasionally, share something unexpectedly with your employees. For example, a large general contractor allowed employees to take home excess materials, such as carpet remnants and drywall. The employees appreciated the gesture, and the company saved the cost of disposal, recycling and restocking.
Fraud is discovered through internal controls, internal or external audits, management investigation, notification by customers or employees, or by accident. Well-treated employees may be willing to report fraud and help you maintain internal controls. Next month’s column will look at the causes of employee fraud and how to detect deception.