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A growing number of Aboriginal communities are establishing businesses to take advantage of opportunities for economic development. These businesses provide funding for programs, and are a source of employment and pride for community members. But any business can fall victim to fraud or other forms of economic crime, such as management conflict of interest or corruption, if the proper internal control environment is not in place.
Fraud and economic crime have impacts that go well beyond the financial loss suffered. Incidents of fraud undermine employee morale. Co-workers often know about ethical violations well before management learns of it, and may wonder, “Why does he/she get away with that?” In most workplaces lost morale results in lost productivity. When management becomes aware of an ethical violation, they are often pulled away from their primary duties to respond to the issue. Time spent investigating the matter, dealing with legal counsel, correcting errors in the accounting system and financial information, and general “damage control” weighs heavily on senior management.
Economic crime within a business can seriously damage that business’ reputation, particularly if the issue is one of corruption rather than internal fraud. Businesses with reputations for economic crime have difficulties attracting qualified employees. External vendors may not want to deal with the business, reducing the ability to solicit competitive bids for service contracts. These issues impact the effectiveness and profitability of the business.
The net effect of the various impacts of fraud and economic crime is the reduced ability to deliver programs and services to the community. The business generates fewer profits to be returned to its shareholders – the community – and its leaders are too distracted reacting to issues of fraud to focus on strategic thinking. Often news of the suspected ethical violation spreads beyond the business and throughout the community. Lines are drawn, sides are taken, and wounds open that can be difficult to heal.
While it is unlikely that fraud can ever be completely eliminated from a business, steps can be taken to manage the risks. Proper internal controls can reduce the likelihood of fraud occurring, detect it earlier to minimize the damage, and demonstrate due diligence on the part of management. Some key steps are:
Awareness of how fraud and economic crime happens within a business, its impacts, and what can be done to minimize the risks, is critical to ensuring the prosperity of your community’s business.
Related Topics:Fraud; Corporate Governance
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