Managing and Preventing Employee Fraud

Employee fraud is a huge problem for small- to medium-sized businesses across the country, as statistics from the Association of Certified Fraud Examiners’ 2012 Report to the Nations show that fraud by employees cost these companies, on average, $60,000 per occurrence.  Worse yet, fraud by managers and upper-level supervisors costs an average of $180,000 every time it happens.

Why are those figures so astronomical?  Simply because most fraudulent activities go on for 18 months or more before they’re discovered.  And unfortunately, those losses are too large from most small businesses to absorb – especially considering 49% of fraud victims never recoup a penny.  With this information in mind, you can see why fraud is the leading cause of failure for roughly 25% of small businesses every year.

Types of Fraud

When most people hear the word “fraud,” they immediately think of embezzlement schemes, money laundering and the misappropriation of huge piles of cash.  But really, that’s only half the picture.  Fraud – especially for smaller businesses – takes many forms, including:

1. Monetary theft
2. Theft of goods
3. Misuse of company assets (physical or otherwise)
4. Bookkeeping inaccuracies
5. Inaccurate reporting of time and/or expenses
6. Bribery and corruption

The ACFE notes that 77% of all fraud is perpetrated by employees working in one of six departments within your business:

1. Accounting
2. Operations
3. Sales
4. Upper management
5. Customer service
6. Purchasing

So now that you know what fraud looks like, how do you spot it?

Spotting Fraud Before It’s Too Late

There’s no easy way to spot fraud or unscrupulous employees.  Fraud doesn’t wave a neon sign and employees who perpetuate these acts don’t wear black ski masks like they do in the movies.  In fact, 87% of those who commit fraud have never done so before and have clean criminal records!

However, 81% of those deceptive employees display some sign of their deviousness – what the ACFE calls “Red Flags.”  These include:

• Living beyond their means – Access to excess cash and the theft of goods has allowed these individuals to live life large.  But often, these habits get the better of them and they extend well beyond their means, creating a series of obvious signs of ill-gotten wealth.
• Financial difficulties – Whether these difficulties are the impetus for the fraud or not, most guilty parties are struggling to manage their own assets and see yours as an easy way out.  Employees who frequently complain about their financial situations while still appearing to live beyond their means should be cause for suspicion.
• Unusually close relationships with vendors or customers – Customer service is one thing, but often, employees are tempted by friends and acquaintances to take a little extra or to accept a “reward” for their hard work.  It’s also a heck of a lot easier to engage in illegal activities when you have an accomplice.
• Excessive control issues – These individuals constantly live in fear of discovery, and their fear shows in their behaviors.  Does your bookkeeper refuse to let anyone else balance the checkbook?  Does your receiver insist that he be the one to check over invoices?  Does your sales team lead insist that they deal with certain individuals?  Though it can be scary to think about, these employees might be hiding something.

Stopping and Preventing Fraud

Stopping and preventing fraud is not an easy task.  There’s no single solution out there that will allow you to rest easy.  However, there are a number of devices, tactics and techniques you can use together to make your company a less-inviting target.

Install cameras and make sure employees know about them

Security cameras keep your business safe from intruders and unscrupulous employees.  Make sure these cameras can be remotely monitored and controlled.  Make them visible to employees and don’t allow them to remain static.  Do consider hiding them behind two-way glass so nobody can be sure where they are pointed at any given moment.

In addition, be sure to have an employee privacy policy in the books to help you avoid legal complications and to educate your workers about why these cameras are there.  You’re not going all “Big Brother,” on them – you’re just trying to protect their paychecks and your livelihood.

Handle or review the books yourself

Even if you don’t like accounting, it’s a good idea to look over your own books, bank account records and checkbook by yourself on occasion.  Make sure these documents are the unaltered originals (pick them up at the post office yourself if you have to) in order to avoid fraudulent activity by your bookkeeper.

It may also be a good idea to spread out financial responsibilities amongst different members of your team.  As an example, you might handle the checks, your bookkeeper handles the statements and somebody else entirely handles the accounts receivable.  This will avoid consolidating total power in one person’s hands and will make it less likely for fraud to occur.

Hire auditing companies

Third party accounting and security consultants can come into your business with a fresh pair of eyes and see potential security problems that you may have missed.  Also, because these individuals are paid to provide objective results, they’re not going to skew their findings just to make you happy, making them a valuable addition to your fraud-prevention program.

Monitor customer and vendor interactions

Keep an eye on your vendors and your big spenders.  These individuals are the most likely to engage your employee in corruption schemes – in particular, kickbacks for placing excessive purchases or for offering special “discounts.”

Watch your employees and managers

Keep an eye on your employees – not just what they’re doing.  Talk to them.  Ask personal questions.  Look for signs of the ACFE’s “Red Flags.”  The better you get to know your employees and managers, the less likely it is that fraud will slip beneath your nose.

Allow for anonymous tipster reporting

Finally, even if you take all of these precautions, be aware that fraud is most often discovered through internal tipsters.  So keep those lanes of communication open.  Consider an anonymous tip mechanism – such as an employee hotline or anonymous online submission form – to allow employees to bring important information to your attention.

Though fraud is a scary thing for any business owner or manager to contemplate, you can reduce your risk of being taken advantage of by implementing the tips described above.  Taking a proactive approach to fraud prevention won’t guarantee that you’ll never be affected, but it can reduce your chances and will go a long way towards minimizing the total of any losses you suffer.