Organizational Challenges – Fraud & Embezzlement

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As we look forward to the start of a new year, I thought I would take this opportunity to raise an important topic and share with you my insights on the significant challenges facing organizations relating to embezzlement and fraud.

When I lecture on business loss prevention, I first of all highlight the issue of how an organization perceives fraud. Should we view fraud/embezzlement as an issue distinct from bad managerial decisions? Both of these cases can inflict massive financial damage. However, the concept of waste and carelessness is often dismissed without pausing to examine and rectify the root cause of that damage.

All organizations are constantly under great internal pressure – some due to internal policies and budgets, some stemming from relations with employees and committees, and some a result of policies handed down from the parent company.

In terms of fraud and embezzlement prevention, organizational culture is a key factor that can create deterrence, helping to reveal malfeasance and reduce harm to the company. Usually organizations operate on the philosophy of “maximum productivity, minimum expense” in order to increase profits. However, this leads to decreased supervision and enabling employees to perform numerous actions, thereby eroding separation of duties and giving more people the opportunity to commit fraud and embezzlement. In addition, organizations’ lack of proactive operations and tendency to only handle incidents that are directly dropped on their doorstep forms the basis for complex large-scale fraud that can result in irreparable damage.

For 16 years, I have explored the root causes, factors, and “black holes” that have led to instances of embezzlement, large and small. I have consistently found that the lack of a positive organizational culture, coupled with poor handling decisions, leads to petty thefts and embezzlement. The way companies treat embezzlement is an important deterrent factor – in cases where a company’s response was inadequate, a much more significant fraud immediately sprang up to endanger the organization. So, while organizations invest most of their money in trying to increase profits, they are simultaneously losing out due to existing weaknesses and vulnerabilities.

In the course of my career, I have encountered embezzlement and fraud in many diverse circumstances. However, one of the most frequent “symptoms” is that, once managers suspect or uncover embezzlement/fraud, they see red and rush to dismiss the responsible party in an effort to minimize damage. Yes, this removes the rotten apple from the basket, but in most cases it fails to result in any lost funds being recovered. In fact, the first thing you should do is RELAX! Take a deep breath and focus on building an effective plan of action. Knowing all the facts is critical when negotiating the return of lost money, and also makes it easier to get a decision in your favor in the labor and law courts, saving on additional costs.

It will not surprise you to learn that the biggest, most influential frauds are perpetrated by managers, those in positions of power, and senior employees with the required access. While non-managerial employees also commit theft and embezzlement, these instances do not tend to harm the organization on a significant or strategic level. However, the cumulative damage of the malfeasance we have not yet uncovered is immense, and simply cannot be quantified.

Experience is the essential factor here, but it is not something you can learn in school. Most vital knowledge is not taught in the classroom or at university. When it comes to detecting fraud and embezzlement, the most important skills are thinking analytically, identifying the source and the method, and thinking outside the box. Conducting a risk assessment focused on loss prevention also reduces the chances that an organization will suffer from unknown losses.

So, as I said: relax. Work with specialist professionals to build a suitable loss prevention plan, and realize that you can recover funds that have been stolen, and find money that has fallen between the cracks. Then you can build a proactive plan designed to prevent various parties from gaining the ability to commit fraud.

We may never be able to eliminate these incidents entirely – but we can certainly reduce them.

Shimon Kahana – December 2016

בי.אל.פי ייעוץ עסקי