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How To Prevent White Collar Crime
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Business New Haven
11/12/2001
By: Lori Green
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Quite a few companies are reacting to bleak earnings projections for next couple of quarters by slashing their single biggest expense: people. This may or may not be a sound business strategy, but it certainly rattles the nerves of retained employees.
It also can stir up discontent and distrust, as employees await the next fall of the ax. Remaining employees are frequently pressured to perform at higher standards of productivity. Not surprisingly, many of these survivors are substantially less motivated than they may have before the purge.
But this is only one scenario in which employees find themselves under inordinate pressure to perform. Sometimes employees are hired at a level beyond their abilities. Others are regularly pressured to attain unrealistically high output or sales targets.
Performance pressure, especially on management, is one of the key drivers of crimes committed in the workplace. There are additional factors that make committing fraud or theft attractive to employees. Many of these risks are embedded in your business' operations and practices.
What to do? The best approach is prevention. If you address potential problems in detail and outline a series of measures to counteract criminal activity, you'll be able to eliminate or substantially minimize financial loss through employee crime. An excellent method of safeguarding your company's assets and reputation is to develop a compliance plan.
A compliance plan is not a foolproof way to prevent a couple of opportunistic warehouse workers from selling inventory out of the back door of your warehouse. However, if both financial and legal professionals design the plan at the outset, you will not only reduce your business' liability but also have recourse to terminate or report thefts as soon as you become aware of them.
Once you find experienced professionals to develop a compliance plan for you, here's what the process looks like:
- The compliance team will first evaluate management characteristics - especially those of people who directly influence and control the way business is conducted. Questions asked include: Are they qualified? Has there been adequate screening such as background checks? Are employees bonded if they are handling money? Are there pressures on management to perform beyond qualifications? Do we have the kind of people working for us who are concerned with financial integrity? Casting a sharp eye over financial people in particular is not unreasonable, since bookkeepers, controllers, various mid-level managers and those with access to both cash and inventory are responsible for a large proportion of white-collar crime.
- The next step is to assess internal controls. Are they structured to prevent an individual from performing two functions that could give him or her direct access to transactions that place the company at risk for theft? For example, is the same employee receiving cash payments and also posting to accounts receivable?
- Industry conditions. Certain sectors are more vulnerable than others to fraudulent practices, such as regulated industries, where payment comes from non-customer sources. For many companies, both public and closely held, if earnings have declined or carry bank loans with covenants to meet certain financial ratios, there's added pressure on management to present financial results in a positive light. Highly competitive industries involved in chip-production or software development, or even biotech companies racing to turn gene maps into successful therapies, also feel the heat to produce earnings, positive clinical trials or the next breakthrough technology. The temptation: financial statement fraud intended to evoke confidence from corporate partners, equity investors or public stockholders.
- Other risk factors include: lack of a consistent set of policies, standards and procedures; lack of oversight of or control over dispersed inventory locations; poor control over key outsourcing partners; insufficient supervision of critical processes within the company; inattention of corporate directors to the importance of compliance issues; information systems security and proper licensing.
- Assets need to be catalogued and reviewed for exposure to criminal activity. Cash, inventory, marketable securities can be easily susceptible to theft. Some companies hire security companies to set up secure rooms for pharmaceuticals or valuable inventory such as jewelry or high-priced components.
- Formal compliance standards and procedures are then developed and included in the company's operations manual. These may include standards such as not accepting gifts from customers or patients, or how to transfer highly confidential documents between managers. A senior manager, other than the business owner, should assume the role of compliance officer responsible for facilitating implementation and monitoring of the compliance plan once it is in place.
Compliance plans are not only for large organizations. Financial professionals and your attorney should be able to create a plan that is appropriately scaled to the needs of your business and specifically focused on your unique risk profile.
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