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Establishing a Fraud Policy

August 2, 2005


Public and governmental scrutiny of appropriate business practices has increased due to  several high-profile cases of fraud in recent years. While most business leaders have heard about fraud cases in the news, many have not yet taken a hard look at their own business to examine whether or not their fraud policy is adequate.

Organizations need not only to be aware of the risk of fraud, but understand how to reinforce ethical behavior and business practices through a comprehensive and enforced
fraud policy. This policy can be used to establish an ethical environment in the workplace and can be an effective tool to deter fraud.

In order for a fraud policy to be effective, management must commit to control fraud and lead by example. Employees need to understand that no instance of fraud will be tolerated
and be aware of the procedures which will take place should an instance of fraud occur.
Communication is the key to a successful fraud policy. The policy should be mentioned on a regular basis to reinforce management s commitment to control fraud and could be incorporated into employee training sessions, periodic emails from the president or company newsletters.

A fraud policy should address the following areas: Overview of management s position on fraud. A description of management s commitment to control fraud and the consequences for an individual who is found to be involved in fraudulent activities should be clearly stated.
Employees should be aware that it is management s intention to hold all employees accountable, regardless of title or position.

A company code of conduct or core values. Management s expectation that all employees behave ethically and honestly in their employment should be clearly stated. A code of conduct commonly includes management s position on appropriate employee conduct at the workplace, expected interaction with customers and suppliers, personal use of company assets, confi dentiality and examples of unethical behavior. It is recommended the code of conduct or core values be printed or displayed in a variety of places, such as the company s Employee
Handbook, common areas or the intranet.

Proactive personnel policies. Verification of employment history, education and personal
references should be completed for all job candidates. Formal employee training on the fraud policy should be conducted and management may want to obtain an employee s signature to document the employee received and understands the policies.

A description of the procedures to be followed when an incident of alleged or suspected fraud occurs. Management should conduct a thorough investigation of all instances of fraud. The investigation process and the actions to be taken against violators should be well-defi ned.

For example, a policy should clearly state that once fraud is suspected, a thorough investigation will take place and the results of the investigation will be communicated to all parties involved in the investigation within a specifi ed period of time. Weak controls that are identifi ed as a result of an investigation should be promptly reviewed and corrected and training should be conducted to reinforce the importance of the fraud policy after any incident.

Procedures for employees to inform management about any suspected or identified fraud. Emphasis should be placed on the fact that an employee s good standing and position would not be affected in any way by informing management about instances of fraud. Several means of communication for employees to report fraud should be listed and may include designating an employee to serve as a contact within the company to receive information, an anonymous telephone tip line, or anonymous post offi ce box.

The policy should require that all tips be investigated by the appropriate level of management. Implementation of controls. Management needs to identify fraud risks within the company and develop specifi c controls to mitigate the risk. Common controls include regular
reconciliations of accounts vulnerable to misappropriation, improvement in segregation of duties and mandatory vacation for employees with access to sensitive information.

Develop oversight procedures. High-level managers should be involved to periodically evaluate the effectiveness of controls outlined in the fraud policy and to ensure the
procedures in the policy are being followed. These reviews should be scheduled and completed promptly to illustrate management s commitment to detect and deter fraud.

Fraud is an increasing concern in today s corporate environment. A written fraud policy can help management address the risk of fraud and develop a corporate environment where fraud is less likely to occur.

For more information about Establishing a Fraud Policy to Protect your Business please contact Tiffany White, a Manager in the Columbus offi ce of Clark, Schaefer, Hackett & Co. at 614-885-2208 or contact one of our six locations for a professional near you.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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