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Employee Fraud: Costly Problem, Low Cost Solutions

| October 18, 2017
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Is your company susceptible to employee fraud? Small-to-mid-sized businesses may be especially vulnerable because they tend to place more trust in employees who have access to company assets, and they generally have fewer financial and security controls in place. The most commonly targeted assets are cash, tangible assets, intellectual property, and time. 

Cash. Funds are often stolen through forgery, check manipulation, or purchasing fraud. For instance, a bookkeeper may insert checks made out to himself or herself among the legitimate checks presented for signature. Or an employee could conduct business with an outside company in which he or she has a financial interest, or favor a particular vendor in exchange for regular gratuities or kickbacks. In one kind of scam, an employee creates a fictitious company and embezzles funds by submitting phony invoices. 

Tangible assets. Equipment, inventories, office furniture, and supplies are valuable commodities. All are susceptible to theft when inventory control systems are inadequate or security is weak. 

Intellectual property. Intangible assets, such as customer lists and pricing policies, are also important to a company’s success. Confidential material, including computerized data, can be stolen when companies fail to establish and enforce appropriate safeguards. 

Time. Time theft occurs when employees simply waste time on the job. Employees also steal time when they improperly punch their time cards, thereby overstating their hours on the job. A less obvious situation involves time lost due to fraudulent workers’ compensation claims. 

Tips for Prevention 

To help minimize the chances of employee fraud occurring at your company, consider the following low-cost tactics: 

  • Conduct thorough background checks on prospective employees. Verify all résumé information, and request an explanation for any unaccounted time. To protect against false references, don’t rely solely on the résumé for the telephone numbers of previous employers. 
  • Create a code of ethical conduct. Defining acceptable standards of behavior can be an effective deterrent in preventing employee fraud. 
  • Institute financial controls. Require employees to disclose all employment and business relationships. Be sure to separate financial functions such as writing and signing checks, recording receivables, and making deposits. To prevent employees from concealing misconduct for extended periods, require short-term rotations or periodic vacations for those who handle cash. Conduct annual independent audits, including reviews of outside vendors to ensure they exist and that the company is paying market rates for goods and services. These controls should apply to everyone, including family members and long-time employees. 
  • Establish security systems to protect tangible assets and intellectual property. Show employees that the building and grounds are monitored. Let them know that the inventory of equipment, products, and supplies is routinely audited. Change computer passwords monthly, and limit access to computer systems from outside the office. 
  • Create a safe channel for employees to report suspected fraud. Set up a toll-free telephone number, post office box, or locked suggestion box to allow employees to report misconduct anonymously. 

Employee fraud can be costly for your business. Even the most trusted employees may be subject to temptation and lapses in judgment. So be sure to establish practices and procedures that prevent employees from having the opportunity to commit fraud in the first place.

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