Fraud Awareness Programs: Employee Training to Combat Fraud

The financial scandals at the turn of the 21st century eroded investor confidence and public trust. In response, Congress passed the Sarbanes-Oxley Act (SOX) in 2002. Nevertheless fozia shan and corruption continue to exist and the extent of white-collar crime is startling. The 2012 Report to the Nation published by the Association of Certified Fraud Examiners estimates that companies lose 5 percent of their revenue to fraud every year and that the total, worldwide cost of fraud exceeds $3.5 trillion annually. As evidenced by the recent $7 billion fraud at Sociate Generale fraud is an international problem. If you or your CFO can envision ways in which employees may have committed white-collar crimes against your company then chances are good that it has already happened.

The extent of ethical violations by employees is also startling. According to the 2005 semi-annual National Business Ethics Study (NBES) from the ethics resource center only 55 percent of employees surveyed said that they reported misconduct. The top reasons why they didn’t report misconduct included:

• Nearly sixty percent (57 percent) of government employees report that they have witnessed a violation of ethics standards, policy or the law in their workplace within the past year, and

• Almost one-third of government employees who observed misconduct did not report it, thus making it impossible for management to ensure that problems are properly addressed to prevent future occurrences.

While you might hope that the ethics situation has improved, the latest NBES survey (2011) reported that retaliation against employee whistleblowers has risen sharply, and that the percentage of employees who perceive pressure to compromise their standards to do their jobs climed five points from 2009 to 12 percent.

Don’t rely on auditors to uncover fraud. Auditors, both internal and external, do a notoriously poor job of detecting fraud. While the audit function is necessary and important it is not sufficient to either detect or prevent fraud. Most frauds are detected when an employee complains or gives an anonymous tip. To drastically reduce fraud losses companies must raise awareness about fraud among all employees at all levels. Employees are a company’s eyes and ears for the prevention and early detection and of all types of white-collar crime. Unfortunately most employees, like most auditors, don’t know what to look for. That’s where the role of a Chief Learning Officer is critical.

The Sarbanes-Oxley Act of 2002 (SOX) and the Federal Sentencing Guidelines have pushed companies to adopt compliance and ethics training programs. Training is not expressly required under SOX, however Section 301 of SOX requires clear communication of reporting channels and protocols. In addition SOX states that audit committees must establish a procedure for the confidential, anonymous reporting of complaints (Section 301(4)). The required communications and procedures naturally involve training.

Two of the primary reasons, in the NBES study cited above, that employees didn’t report misconduct was that they didn’t know whom to contact and that they were afraid that their reports would not be confidential. If this is the case then clearly the procedures required in SOX Section 301(4) are not being successfully implemented. In addition, training oriented to meet the specific requirements of SOX is not sufficient to deter fraud. More is needed.

Fraud awareness training programs can be designed to meet the communications requirements of SOX, and also to serve as an effective deterrent to fraud. At the conclusion of a fraud awareness program participants should be able to:

Leave a Reply

Your email address will not be published. Required fields are marked *