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Reducing Employee Fraud Risks

Employee dishonesty is a challenge for companies of all sizes, but small businesses are especially vulnerable because they lack large financial staffs and sophisticated controls employed by larger companies to protect against employee theft of equipment, data and even money.

According to the Association of Certified Fraud Examiners, 42 percent of people victimizing businesses were employees, with small businesses accounting for nearly a third of fraud or theft incidents.

In addition to the financial losses, fraud at a small business is often compounded by a personal violation of trust. Because financial duties such as recordkeeping and bill paying are often handled by a single employee, many business owners run the risk of being victimized by a long-time employee or even a family member.

Many employee fraud schemes start small with the employee "borrowing" funds they intend to pay back. Before long, fraud expands and continues unabated until the employee is eventually caught.

Checks and Balances

One of the easiest ways to prevent employee embezzlement, or other forms of internal theft, is to establish procedures that ensure that the same person doesn’t control the company’s entire financial system. For example, if a single bookkeeper is writing checks, making deposits and reconciling bank statements, an important opportunity to identify potential fraud or embezzlement is lost through lack of oversight.

Antifraud professionals say business owners should be aware of the following "red flags" that may indicate fraud is taking place:

  • An employee apparently living beyond his or her means
  • Complaints about money problems or work conditions
  • A reluctance to take time off or share financial duties with co-workers
  • The appearance of unfamiliar vendors in your company's check register

Antifraud Defenses

Fraud specialists suggest the following measures to help reduce the chance of your business being victimized:

  • Have monthly bank statements sent to your home or accountant. Review all outgoing checks and deposits to make sure checks are sent to pay legitimate company expenses. A quick scan of the detailed statements from your bank can indicate discrepancies. Ask your commercial bank representative to review statements for signs of impropriety.
  • Control your checks. It’s a common scheme for unscrupulous employees to steal high-numbered checks from the back of unused checkbooks. This scam often remains undetected for a long time.
  • Avoid signature stamps. Unguarded blank checks and signature stamps are a temptation and bad business practice.
  • Institute a policy that requires bookkeepers to take two-week vacations annually. Financial employees who are reluctant to take vacations may appear dedicated or loyal, but in reality, these employees may not want to disrupt on-going schemes.
  • Have your company’s financial records audited annually. The additional cost will be offset by reduced fraud and the peace of mind that financial accounts are in order.

Retailers should have more than one person counting and handling cash, or should make sure that the person who counts the cash doesn’t also make the bank deposits. This reduces the risk of someone preparing one deposit slip in your workplace and a different, fraudulent deposit ticket on the way to the bank.

Conducting oversight activities takes time that you’d otherwise devote to business development, but if employees know that you’re keeping an eye on the books, the temptation to cut corners, or to help themselves to company funds or equipment is greatly reduced.