According to the Association of Certified Fraud Examiners, when one occupational fraud perpetrator pulls off a scam, the employer suffers a median loss of $75,000. When crooked individuals team up, that median loss rises to $135,000. And when three or more crooks work together to defraud an organization? $329,000. That’s the power of collusion.

If such financial consequences weren’t bad enough, collusion can also destroy a company’s reputation. After all, from the perspective of investors, lenders, customers and the general public, the defrauded business may seem corrupt and chaotic — certainly not trustworthy. So you must do everything possible to discourage collusion and other forms of fraud in your business.

Preventing control workarounds

Internal controls, or policies and procedures that can help minimize criminal behavior, are essential to preventing fraud. However, colluding thieves often ignore internal controls and find workarounds. For example, a colluding manager might override controls to allow another employee to commit expense reimbursement or payroll fraud.

To prevent such scenarios, ensure your company’s controls function as designed. Does an employee’s failure to comply with a policy raise a red flag? Are controls regularly reviewed for compliance and efficacy?

When employees know unexpected audits are possible, they’re generally less likely to attempt fraud. Surprise audits focusing on your company’s vulnerabilities (such as inventory or cash-on-hand) should be conducted by outside fraud experts. Keep the time and place confidential to only those who need to be in the loop. That way, a colluding manager is less likely to be able to warn fellow thieves or falsify an audit’s results.

Monitoring employees

Obviously, you want employees to be collegial with one another and friendly with customers and suppliers. But question any workplace relationships that seem suspicious. For example, does a non-accounting worker spend an unusual amount of time in an accounting staffer’s office with the door closed? Is an employee too chummy with a vendor? Vet vendors carefully to ensure, for example, that information such as a supplier’s street address and phone number don’t match those of any employees.

You should also monitor employee communications such as email or instant messages shared on your network. (Just make sure you get the go-ahead from legal counsel first.) If employees lapse into unintelligible code in messages or indicate they lack respect for your company’s policies and procedures, consider conducting a deeper investigation.

Another idea is to implement a job rotation program. Job rotation makes it harder for fraud perpetrators to work together to hide criminal activity. In fact, if an employee resists participating in a job rotation plan, you might want to look closer for other red flags. Along the same lines, require everyone to take vacations. Pay attention to employees who continually avoid time off or want certain individuals to cover their work while they’re out.

Promoting ethical behavior

Finally, promote an ethical culture by modeling good behavior. Make sure your executives never override controls or brush aside complaints about rule-breaking or suspicious activities. If you don’t already have one, put in place a confidential fraud tipline. You might even want to include ethical behavior in your employee evaluations. Employees will get the message — and those bent on fraud will have a harder time finding partners in crime on your premises.

(This is Blog Post #1696)