The Enemy Within: How can you prevent employee fraud?

Occupational, or employee, fraud is an ongoing hazard to businesses’ bottom lines. It can take several forms from skimming to billing schemes, corruption, and asset misappropriation. In their 2018 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) estimated that the average business loses about 5% of its annual revenue to fraudulent actions by employees, while the median loss is a hefty $130,000 per case. Organizations without antifraud controls suffer even greater overall losses. Further, the majority of fraud victims don’t recover their losses, so it’s important for business owners and management to find ways to prevent employee fraud and reduce its impact.

How can you reduce risk?

While all organizations are at risk for fraud, companies with fewer than 100 employees tend to suffer disproportionately. Why? They’re more likely to have weaker internal controls due to factors such as a limited number of personnel and less management oversight. By taking proactive steps, business owners and managers can slash the risk that their organizations will be hit by fraudulent activity and uncover any wrongdoing more quickly. The sooner a perpetrator is caught, the less harm he or she might cause.

How can you protect your business?

Remain vigilant. Look for common warning signs of fraudulent activity, such as an employee who’s living well beyond his or her means or a worker who refuses to take time off. While the latter might be a sign of dedication, it also can signal the individual’s concern that a replacement will discover his or her criminal activities. An employee who insists on working odd hours, when he or she is most likely to be alone, also may be trying to get away with something.

Separate duties. The more difficult it is for a single employee — acting alone — to commit a crime, the less likely it is to happen. That’s why many companies require multiple individuals to authorize disbursements over certain amounts or assign one employee to add vendors to the payables system and another to pay them. Separating duties also makes sense when reconciling bank accounts and other statements. The employee charged with making deposits or disbursements shouldn’t also reconcile the bank accounts, as doing so creates an opportunity to hide any wrongdoing. In small companies, having the bank statement delivered unopened to the owner for his or her review is an effective way to deter unauthorized activities.

Proactive monitoring. Have surprise audits and reviews, by management and owners. Knowing that someone might be checking in and reviewing occasionally is a strong deterrent as the perception of getting caught is greater. Don’t just notify employees that this might occur – follow through and do it.

Use physical controls. Locking away checks and financial statements and allowing access only to employees who require them for their jobs not only makes it more difficult for other workers to misuse these instruments, but also sends a signal that management takes seriously the need to safeguard the company’s assets.

Train employees. Educate staff members to know what fraud is and how it can occur, as well as how it can hurt the business and ultimately their livelihoods. Armed with this information, employees will be better able to identify fraudulent actions. And, by simply discussing the issue, management emphasizes the fact that it’s on guard against potential wrongdoing.

Implement a tips hotline. Tips from employees or vendors accounted for nearly 40% of all fraud detections in the ACFE report, making it the most common detection method. It pays to establish a means for employees to securely let the appropriate manager know if they have reason to suspect fraudulent behavior.

How can you reduce potential losses?
Why simply shrug and accept employee fraud losses as an inevitable cost of doing business? You might not be able to eliminate fraud, but if you take these antifraud measures, you’ll greatly reduce any potential damage.

We can review existing internal controls and develop new controls for an effective employee fraud prevention plan for your business.

About the Authors

Bryant D. Petersen
Bryant D. Petersen
Director, Valuation/Litigation Support Services


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