Internal Auditor

December 1, 1999

FRAUD MAY START NEXT DOOR

Employee fraud has long been a concern for internal auditors; but despite the focus on deterrence, two recent studies indicate that the threat continues to grow--seemingly unchecked. When asked to identify the greatest risk to their organizations, 50 percent of respondents to the 1999 Business Fraud Survey point to employee fraud.

Part of the problem might be organizations' ethics and fraud programs. Of the 322 respondents to the survey, cosponsored by The Institute of Internal Auditors and the Institute of Management and Administration (IOMA), 32 percent describe their companies' policies as "well-intended but meaningless to employees," while another 21 percent note that they were simply "nonexistent." In addition, 6o percent characterize their internal audit departments' fraud and risk analysis processes as reactive rather than proactive.

Survey participants also indicate that their internal audit departments receive little or no outside support. They describe the organizations' external audit firms as either cavalier, believing that fraud detection is not their job---41 percent--or earnest, but inept--32 percent. Further, approximately a third of the participants have some doubts about whether their CEOs, audit committees, or members of senior management are sufficiently committed to fraud prevention.

A separate study by Michael G. Kessler & Associates, Ltd. supports the Business Fraud survey findings. "Not only do employees steal," note the survey's authors, "but they outsteal shoplifters...and the thefts are increasing at an alarming rate." The international investigative and forensic accounting firm surveyed more than 500 employees in the United States and discovered that employees readily admit to taking office supplies, exaggerating expense reports, stealing inventory, and falsifying time sheets. In fact, 79 percent of employees claim that they would attempt to steal from their employers--49 percent out of greed and 43 percent in retaliation for perceived injustices or to make up for some slight.

Both studies conclude that organizations need a clear message from management stating that employee fraud will not be tolerated. "Provide a strict written policy on dealing with employee theft," suggest the Kessler report's authors, "and vigilantly follow through on written procedures. If the employee manual calls for criminal prosecution and it is not upheld, it sets a poor example for the entire workforce." In addition, the Kessler report strongly suggests that organizations provide a grievance process for employees, allowing them fair representation if they feel they have been treated poorly. Screening all new employees thoroughly before bringing them on board is also urged.

The single most important factor in fraud deterrence, according to 58 percent of respondents to the Business Fraud survey, is to "hold management accountable to the same standards for misconduct as rank-and-file." In addition, 63 percent note that the best way to circumvent fraud would be to strictly monitor basic internal controls; and 47 percent claim that leading-edge technology and better training in interviewing would improve the effectiveness of investigations.