Fraud Prevention Tip: Leverage the Value of an Informal Fraud Policy

We’ve been talking about fraud, and last week I asked you to create a fraud policy if you didn’t already have one. Pardon me for assuming that you don’t already have one but experience tells me you don’t. What you may find that what you do have, though, is an informal fraud policy – and you may not even know it.

Though I insist that an official, stated, written and shared Fraud Policy is important, I will be happy knowing that you also have an informal fraud policy.

An informal fraud policy is one that is implied by your actions and the state of things around your business – like security – but that is not directly stated. An informal policy is also known as a psychological fraud policy.

The Circuitous Route

I once ran a retail chain out of Delaware. The shrinkage was 5 or 6%, and when the company was doing 100 million dollars a year in business, we weren’t talking about an insignificant number here. That was about 6 million dollars a year of stolen goods.

Before I got there, when a cashier or sales associate was caught stealing the manager would have that person quietly taken into the back, loaded into a police car and inconspicuously taken to jail. But this is not Victorian England, and we need not be so discreet.

When I started running this operation and I caught someone stealing, I had multiple police officers parade them through the store in hand cuffs in a circuitous route. The police car would be out front lights swirling and sirens blaring, and the perpetrator would have tears coming out of his or her eyes. I wanted everyone to see, from employees to customers to management.

The Effects of the Roundabout Way

That policy resulted in a reduction of shrinkage by 50% in the first month. Over the course of the year that translated into three million dollars saved because people became far more terrified of the embarrassing consequences of getting caught stealing. They knew that I would take real and serious action against them and prosecute them for stealing.

Another example of a psychological fraud policy is a warehouse at which I had a ton of merchandise walking out the back door. All I did was stick a camera right outside that door, drill a hole in the wall and feed a little wire through. That camera and wire didn’t even go anywhere! They weren’t hooked up, but just putting it there scared everyone enough to stop stealing. Shrink declined immediately and dramatically.

Those are examples of informal and psychological fraud policies. Neither is stated in words on a sign, but they are actions that are regularly being taken agains those who are stealing and committing fraud, and employees understand the consequences of those actions.

Do you have an informal or psychological fraud policy at your business? If so, what is it and if not, what sorts of measures could you put in place to have one?

You’re Serious? You Don’t Have a Fraud Policy?

Though I could believe it, I was still shocked when I spoke recently to a group of over 200 CEOs, not one of whom raised his or her hand when I asked who had a fraud policy. Disheartening still was that most people didn’t even know what I meant when I asked the question.

What is a Fraud Policy?

A fraud policy is similar to a mission statement and core values. Most companies have a mission statement. It says something to the effect of why the company exists and what it was formed to do at the highest level. Core values might further flesh out those elements of a company’s attitude and approach that are indispensable to its running successfully year after year. They might deal with product quality, customer service, community interdependence and so forth.

If you go into any Whole Foods, for instance, you’ll see the mission statement and core values on huge signs near the checkout area at the front of the store. Many companies even spend tens of thousands of dollars (or much more) hiring consultants to perfectly craft their mission and values.

Similarly, a fraud policy clearly states – for all to see – the approach a company takes towards those who commit fraud, steal, lie or cheat.

For instance, a fraud policy could state something like, “If you steal, you will be prosecuted to the fullest extent of the law.”

Why Don’t Companies Create Fraud Policies?

With all that time and energy invested in mission statements and core values, why don’t companies take ten extra minutes to tack on a Fraud Policy and then display that at the front of their stores, websites, factories and warehouses?

In short, I think they don’t know they should. So let me be the first to tell you that you should. Every single company should have a fraud policy.

As you can see, it doesn’t take long to come up with a Fraud Policy, especially since it doesn’t need to be perfectly crafted and expertly displayed. Crudely stating, “If you steal, we will throw your butt in jail so fast it knocks the shoes off your next of kin,” would be sufficient. The point is to share the very direct fact that no one will get away with fraud or theft, and if people do steal from you they will be caught and they will be prosecuted to the fullest extent of the law.

Let’s Make a Plan

So, this week, I want you to take the time to make an official fraud policy. Display it, own it and love it.

In addition to putting that on your to-do list, we’re going to put some things on The Turnaround Authority To-Do List. To honor Fraud Prevention Month, we’re going to address numerous issues about fraud throughout the month of March, and even continue well into April since preventing fraud is a year-round process.

In coming posts I will discuss the importance of prosecuting perpetrators of fraud and the values of an informal fraud policy. I will also share a dozen tips and ways that you can prevent fraud, things that you should watch out for, and much more.

If you know other business owners or managers then this is the time to forward them a link to this blog, and if you haven’t yet subscribed to The Turnaround Authority, I encourage you to do so as we prepare to prevent fraud and make the business world a safer and more honest place.

So, I ask you to share right here: what is your Fraud Policy and what are you doing to spread it throughout your company?