Employee Fraud: Protect Your Credit Union
by Michelle McHale
Credit Union Advisor, 2007 Spring

Research performed by the Association of Certified Fraud Examiners (ACFE) shows that the typical organization loses 5 percent of its annual revenues due to fraud. The accounting profession and the federal government have responded with acts such as Sarbanes-Oxley and standards such as the AICPA’s Statement on Auditing Standards No. 99. But for many companies, the answer of more accounting, more professionals, and more duties for already overworked employees is not an option.

How can you protect your credit union? Below are some ways to decrease susceptibility to fraud by maximizing existing resources.

Adhere to a Strict Code of Ethical Conduct — At All Levels

Ensure the rules of conduct apply equally to everyone within the credit union. Often, especially in smaller organizations, controls aren’t followed at the higher levels of management. Undesirable conduct can fall into many categories, from circumventing internal controls (e.g., not requiring approvals on certain transactions) to seemingly harmless behaviors such as personal use of the telephone for long-distance phone calls or use of supplies for personal shipments. Employees are keenly aware of upper management’s adherence (or lack thereof) to policies and procedures. Leading by example is an excellent way of showing your employees what conduct is expected.

Strengthen Good Hiring Practices

Fraud prevention is facilitated by good employees. Have an outside service perform background checks on potential candidates. Contact references and verify educational degrees to ensure that the person showing up for work is the same person who looked so good on paper.

Tighten Computer Security

No employee should have access to areas in the system that aren’t part of his or her job responsibilities. Establish security to limit access appropriately.

Search for Red Flags

As part of their normal duties, management should periodically review documents and data to uncover potential warning signs and follow up with the appropriate staff regarding unusual or irregular transactions. This will accomplish two objectives: First, it may enable management to uncover small errors or irregularities before they become big problems. Second, the process will alert employees that you’re watching, a fact whose importance should not be underestimated. Research performed by the ACFE suggests that increasing the perception of detection is the most effective means for deterring fraud.

Make Your Staff Accountable

Remember, many frauds are discovered through tips from other employees. If you can create ownership of responsibility for misconduct, you’ll have many watchdogs in your organization. A great way to empower individuals at all levels of your organization is to create a mechanism, such as an anonymous hotline, to facilitate the reporting of misconduct.

Ongoing Commitment Is Key

It’s crucial to continually think about how to improve your internal control environment and your ability to detect and deter fraud. Remember, the typical organization loses 5 percent of its annual revenues due to fraud—and that’s typically much more than most organizations can bear. If you’re concerned about your internal controls, we can help. Call Michelle McHale today at 616.643.4059.

For Your Consideration: Why Employees Commit Fraud

Experience has taught us that employees tend to commit fraud when three conditions are present:

• Pressure — In general, most people have an incentive, or pressure, that leads them to commit fraud. It can come from personal financial problems, personal vices such as gambling, or unrealistic deadlines or performance goals.
• Opportunity — Opportunity for fraud exists when employees reach a position of trust, internal controls are weak, or supervision is lacking.
• Rationalization — Rationalization is a self-defense mechanism used by most individuals to justify their unethical behavior (“I’ll pay it back when I get my paycheck”).