The Role of the Attorney in Client Fraud Prevention

fraud prevention
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The most trusted adviser to a company is often their attorney. One way of protecting your clients is to remind them to consider fraud prevention. The attorney will not usually be directly involved in the development of fraud prevention and/ or detection processes, but they are the ideal advisor to remind their clients of the need to be vigilant.

Types of Fraudsters There are three general types of people who commit fraud against their employer: (1) diehard criminals looking for a way to take advantage; (2) otherwise honest people who give in to temptation when confronted with opportunity over and over again; and (3) otherwise honest people who, under severe stress, give in and take advantage of an opportunity to gain financial benefit. Internal controls should be designed to prevent anyone from defrauding the company. However, in the case of type two and three employees, effective internal controls can prevent otherwise honest people from making a catastrophic mistake.

Jaburg Wilk

Fraud prevention must be an ongoing process of evaluation and implementation by owners, executives and managers. The fraud prevention suggestions provided below are by no means comprehensive. They do provide some ideas you can suggest to your clients.

1.) Let Them Know They are Being Monitored

When employees are aware that monitoring is taking place there is a significant deterrent effect for those employees who may give in to temptation or stress. Protecting the company’s valued employees from their own potential mistakes is as much a part of effective internal controls as protecting the other assets of the company. In particular, this strategy is very effective for type two and type three employees.

2.) Rotate People Between Jobs

Look for opportunities to have people cross train into different areas. If employees know that next week or next month someone else will be doing the job, they are less likely to take advantage of perceived opportunities to commit fraud. This also decreases access to sensitive areas.

3.) Maintain Professional Skepticism

When an internal accountant sees essentially the same types of reports and data period after period, they may not notice changes that have gradually occurred, which could indicate potentially fraudulent activity. One procedure to address this situation is to consider bringing in an outside consultant, preferably someone who is a certified fraud examiner, to evaluate fraud prevention processes that are in place and offer suggestions for other methods.

4 .) Identify Relevant Relationships Within the Data

Analyze relationships in the financial data. For example, sales dollars per manager could decrease due to skimming schemes perpetrated by one individual. Third-party consultant or contractor costs per month or quarter could increase due to fictitious invoices. Increased travel expenses per employee could indicate an employee is falsifying expense reports. Payroll expenses per location could increase due to the creation of fictitious employees.

As with most elements of income and expenses, there are multiple factors affecting their behavior. Any one comparison does not necessarily tell the full story, but by performing a few periodic tests on some high-risk areas, abnormalities can be identified and investigated. High-risk areas will vary by industry, but below are a few other potential data relationships to monitor in the fraud prevention and detection process:

  • Number or dollar amount of customer discounts per number or dollar amount of sales.
  • Sales per location, employee, hour or number of transactions.
  • Any expense line item as a percentage of sales, or other relevant factor.
  • Sales per number of transactions.

Summary

The company attorney can provide a valuable role in reminding their clients that regardless of their size, any company can be the victim of employee fraud. Often management is so caught up in working in the business that they fail to work on the business. This can be particularly true with fraud prevention. A proactive reminder from their company attorney can save the client many thousands of dollars and the heartache of having to file fraud charges against a once-trusted employee.

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