Internal Fraud – Ideas on How to Protect Your Company

Oct 29, 2021

One of the most devastating issues that a company can face is internal fraud.  I’ve seen this impact the smallest and the biggest of companies.  Either way, the emotional, operational, and financial disruption that follows these incidents can be a challenge for companies to overcome and in some unfortunate instances, it has been their demise.

To help protect your entity from internal fraud, DHW offers the following tips to help you understand why people commit fraud and some great information on how to protect your entity from becoming a victim.

Why do People Steal?

Pressure – reason to commit fraud can originate from someone having a significant financial need or problem.  In addition, a substance or gambling addiction can also be a root source.  In any case, often this “need” or “problem” is non-sharable in the eyes of the fraudster.

Opportunity – is generally created by weak internal controls, poor oversight, and/or accomplished by those who can use their position or authority to commit fraud.  The good news is that opportunity is the piece that organizations have the most control over!

Rationalization – involves the fraudster “justifying” the reason to commit fraud.  This could come in the form of someone with the mindset that “I deserve more,” “Everyone else is doing it,” or “I have nowhere else to go” for resources.

The combination of these three factors can create a recipe for disaster for any Company.

What are the Warning Signs?

There are many signs that should trigger concern for fraud but, the most common include:

  • Significant changes in behavior patterns
  • Criminal or questionable backgrounds
  • High personal debts or financial losses
  • Inadequate income for lifestyle
  • Addictions (gambling, drugs, etc.)
  • Resentment of superiors and frustrations with job
  • Emotional trauma in home or work life
  • Exerts unusual control over financial information, refuses assistance, rebukes questions
  • Takes minimal vacation or works odd hours

Preventive Controls

The good news is that there are many methods and procedures that are designed to prevent invalid transactions from being processed, and/or assets from being misappropriated such as:

  • Segregation of duties in connection with financial transactions
  • Pre-approval of actions or transactions
  • Computer passwords and access controls
  • Job rotations and enforced vacation policies
  • Thorough employee screening and background checks
  • Physical controls over assets, (e.g. inventory)
  • Mail controls
  • Frequent audits for duplicate vendors and payments

In summary, companies can prevent the risk of internal fraud by using the above guidance to spot the “red flags.” Never overlook the obvious, ask questions until a satisfactory and substantiated answer is received and finally, always maintain a healthy dose of skepticism as too much trust can be just as devasting as no trust.

For more information on how DHW can help your Company assess potential risk in your organization and design preventative controls, please contact Tim Reynolds @ or 828-322-2070.