Corporate fraud is a white-collar crime that can potentially bring down companies and cause huge losses for investors. It is so pervasive that the FBI has a white-collar crime unit dedicated to fighting corporate fraud and white-collar crime. Corporate fraud around the globe is estimated to cost companies and governments over $40 billion each year. Corporate fraud can be reduced by instituting internal controls and providing employees with mechanisms to report these illicit activities.
Employee confidentiality is a key component of any corporate fraud reporting mechanism. If an employee feels that she may be threatened for reporting corporate fraud, the chances of the crime being reported is drastically reduced. In addition to keeping the employee safe from retribution from those she is reporting, confidentiality also keeps the employee safe from vengeful acts from the company, who could be at risk of financial penalty if the reported fraud is found to be factual.
Fraud reporting mechanisms are a useful way to control the amount of risk that a company incurs due to potentially unscrupulous employees. A company that implements a zero tolerance approach to fraud is less likely to incur financial losses due to employee fraud than companies that have less stringent policies. The internal controls that a company institutes should be reflective of this zero tolerance policy.
Commitment to Good Business Principles
Reporting mechanisms for employee fraud prevention are a positive way to institute good business principles within the business. While implementing internal controls and fraud reporting mechanisms are useful means to control risk, they are also a means for management to show commitment to good business principles. Internal controls help the company define objectives and provide mechanisms to achieve those objectives.
Effective Fraud Prevention
The importance of fraud prevention mechanisms lies within its effectiveness. One of the most effective mechanisms of fraud reporting is the use of anonymous telephone tip lines. The cost of such programs may be high, but the potential losses that it can prevent are much higher. Businesses should consider these costs to be an investment in loss prevention and risk control.