by Jim Marasco , CPA,CIA, CFE Fraud Matters, Fall 2009

One of the key elements to understanding fraud is to realize that where opportunities exist, perpetrators can act. An organization’s ability to heighten the perception that fraud will be detected will substantially lessen the likelihood of its occurrence. Perpetrators are less likely to commit fraud if they believe they will be caught. Controls could exist to detect fraud, but if no one is aware of them, the fraud could still take place. On the flip side, even if the internal controls are weak, if they are perceived to exist, fraud could be prevented. Therefore, a key element of fraud prevention is to increase the perception that fraud will be detected.

External Threats

Organizations face a multitude of threats. In some industries, these threats exist in the form of customers, vendors and even their competitors. Customers pose one of the greatest risks in the retail industry. Shoplifting costs retailers approximately 1.44 percent of their annual revenues, according to a National Retail Security Survey. These annual losses are estimated in the tens of billions of dollars. Raising the perception that theft will be caught is paramount in this industry. Some of the perceptive measures that can be noted include:

• Signs on the front doors that inform “shoplifters will be prosecuted to the fullest extent of the law”
• Placards that advertise cameras exist in the parking lots and throughout the store • Random announcements over the broadcasting system directing that “security scan area xyz, please”
• Merchandise tags on products, along with detectors at the door, whether activated or not
• Bubble lenses throughout the store, whether a camera exists or not

Other industries could employ tactics that exhibit a strong control environment to increase perception. For years, airports gave the impression that their security measures were sound. In reality, luggage was rarely ever scanned for explosives, and security personnel were inadequately trained and staffed. For many years, this perception alone was enough to safeguard the industry. Even after 9/11, the airports were staffed with National Guard troops wielding 9mm Berettas. It was only afterward we learned that most of these weapons were not loaded.

Internal Threats

Organizations face challenges from internal threats – primarily from their employees. Publicizing fraud awareness is critical to safeguarding your operations from this group. Examples of what employers have adopted include:

• Installing cameras throughout their facilities
• Routinely reminding staff that their e-mails, telephone calls and Internet travels can be or are monitored by the company
• Educating employees on the methods that people use to steal from the company to raise their awareness that the organization is tuned into this behavior and will monitor for it
• Periodically auditing segments of the organization or publicly displaying that monitoring does occur
• Taking a tough stance once fraud is found. A strong message should be communicated throughout the entire organization.

Normal Occurrences

The perception that compliance is being monitored is evident throughout society. Our everyday lives are affected in ways we don’t realize. For example, cameras or camera-looking devices atop traffic signals now have us scared to race through a yellow-turning-red traffic light. The music industry has prosecuted individuals for illegally downloading music from the Internet. For many people, these tactics offer the impression that someone is watching their actions and convince them to refrain from illicit activity. One of the greatest examples lies in the gaming industry. In the 1995 movie Casino, Robert DeNiro describes the internal controls that exist in a casino with the following quote: “In Vegas, everybody’s gotta watch everybody else. Since the players are looking to beat the casino, the dealers are watching the players. The box men are watching the dealers. The floor men are watching the box men. The pit bosses are watching the floor men. The shift bosses are watching the pit bosses. The casino manager is watching the shift bosses. I’m watching the casino manager. And the eye-in-the-sky is watching us all.” Whether all these people are actually watching each other or know what they’re looking for, the perception that everyone is being watched or scrutinized has helped safeguard this industry for years. Detection could occur through such measures as:

• Strengthening internal controls
• Maintaining an internal audit function
• Giving employees access to report suspected abuses (anonymous hotlines)
• Educating employees, vendors, etc., about the warning signs of fraud and the corporate policies prohibiting it

Increasing your organization’s perception toward fraud prevention and detection will help safeguard your company as well. A trained fraud examiner can assist you in analyzing where your organization measures up.