Ten steps all organisations should consider to reduce the risk of internal fraud and theft

13 November 2020

Michael Cassidy, National Leader, Forensic Services |

In today’s business environment, many organisations are facing significant challenges when it comes to theft and fraud committed by trusted employees.

In particular, small to medium-sized and family businesses are experiencing substantial losses, usually through the misappropriation of cash or stock over a significant period.

So how can you reduce the risk of internal fraud and theft?

BDO’s Forensic team is experienced in performing these types of investigations. We have identified several key themes that aided the perpetrators of the alleged frauds and limited the ability of the businesses to identify the issue and effectively manage the incident afterwards.

The key themes include:

  • Suspected employees held middle management positions and had unrestricted access to the organisation’s cash and banking facilities, as well as related records.
  • No segregation of duties of key business functions (e.g. invoicing and payments, cash and stock handling).
  • Lack of oversight by the owners in the daily operation of the business.
  • Lack of appropriate internal policies or procedures for the handling of cash or stock.
  • The fraud was committed over several months/years before being detected.
  • An over-reliance on auditors to detect fraud.
  • Employment contracts did not account for possible employee dismissal due to serious misconduct, such as theft or fraud.
  • No insurance coverage for employee dishonesty/theft.

Our team has identified some simple but important steps that can be implemented to be proactive in reducing the risk of internal fraud and theft: 

  1. Tone at the top – establish, maintain and promote an ethical corporate culture;
  2. Ensure a fraud and corruption control plan is in place;
  3. Undertake regular fraud risk assessments;
  4. Undertake employee fraud awareness training;
  5. Implement a whistle-blower reporting mechanism;
  6. Segregation of duties – where possible, separate key functions such as invoicing and payments, to ensure that no single person has access to all relevant processes;
  7. Policies and procedures – develop relevant and specific guidelines for employees to follow when handling cash or stock;
  8. Ensure regular independent stocktakes and cash counts;
  9. Pre-employment screening – verify applicants stated qualifications and interview nominated referees. Obtain a National Police Clearance for positions of trust, including where money or funds are being managed;
  10. Employment contracts – ensure that employment contracts take into consideration relevant employment and industrial relations legislation requirements, including the possible need to take disciplinary action in cases of serious misconduct, such as internal theft or fraud; and

Organisations should also consider the necessity for employee dishonesty/theft coverage under the business insurance policy.

BDO’s Forensic Services professionals can help you implement effective procedures to reduce the risk of internal fraud and theft. Contact your local BDO adviser for a confidential discussion.