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

This article was originally published 28 January 2021.

In today’s environment, many organisations face significant challenges when it comes to theft and fraud committed by employees, usually through the misappropriation of cash or stock over a significant period resulting in a substantial loss.

Factors including tightening organisational resources, potentially decelerating job markets, increasing interest rates and cost of living pressures can entice individuals to fund and maintain their lifestyle through fraudulent means and contribute to the unfortunate outcome of increased internal theft and fraud.

How can you reduce the risk of internal fraud and theft in your organisation?

Key internal fraud threats

BDO’s Forensic Services team has identified several key themes that aid perpetrators of alleged frauds and limit the ability of businesses to identify issues and effectively manage incidents afterwards.

Key themes include:

  • Unrestricted access of middle management employees to the organisation’s cash and banking facilities, as well as related records
  • No segregation of key business function duties (e.g. procurement, invoicing and payments, cash and stock handling)
  • Lack of oversight in the daily operation of the business
  • Employees who appear to be living beyond their means
  • Limited consideration of fraud risks specific to the organisation and lack of appropriate internal policies or procedures to address them
  • Fraud continuing over several months or years before being detected
  • An over-reliance on auditors to detect fraud
  • Employment contracts not accounting for possible employee dismissal due to serious misconduct, such as theft or fraud
  • No insurance coverage for employee dishonesty or theft.

Ten steps to prevent internal fraud and theft

To help your organisation reduce the risk of internal fraud and theft, our team has identified ten simple but important steps that can be proactively implemented. These include: 

  1. Establishing, maintaining and promoting a tone at the top through an ethical corporate culture
  2. Ensuring a well-structured fraud and corruption control plan is in place
  3. Undertaking regular fraud risk assessments
  4. Undertaking employee fraud awareness training
  5. Implementing a whistleblower reporting mechanism
  6. Segregation of duties. Separating key functions, such as invoicing and payments, to ensure no single person has access across all processes without proper scrutiny
  7. Developing relevant and specific policies, procedures and guidelines for employees to follow regarding identified fraud risks
  8. Ensuring regular independent stocktakes and cash counts
  9. Verifying applicants’ stated qualifications and interviewing nominated referees through pre-employment screening. We recommend obtaining a National Police Clearance for positions of trust, including financially associated roles
  10. Ensuring employment contracts consider 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. The necessity for employee dishonesty and theft coverage under the business insurance policy, should also be considered.

BDO recommendations

The recent release of the updated Australian Standard AS8001:2021 – Fraud and Corruption Control is a timely reminder that the shape of modern business is continuing to evolve and reducing the risks of internal fraud and theft means taking a proactive approach. Understanding the key risks is just the first step.

BDO recommends a periodic review of fraud control frameworks and internal controls to ensure they remain fit for purpose and effective in meeting the changing needs of your organisation as it grows and changes in the modern business environment.

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 today for a confidential discussion.