Putting the Brakes on Employee Fraud

Business owners and executives are concerned about the damage that a cyber-criminal could wreak if he or she hacked into their organizations’ information systems. At the same time, occupational or employee fraud is a significant and real danger. The average business loses about 5% of its annual revenue to fraudulent actions by employees, according to estimates provided by the Association of Certified Fraud Examiners (ACFE). The median loss? A hefty $145,000.

The most common type of fraud, accounting for about 85% of the incidents in the ACFE report, is asset misappropriation. This crime might involve an employee who creates and pays a fictitious vendor, submits an inflated expense report, steals inventory or intercepts cash collections.

No business is exempt

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 a limited number of personnel and less management oversight. However, by taking proactive steps, business owners and managers not only can slash the risk that their organizations will be hit by fraudulent activity, but also uncover any wrongdoing more quickly. The sooner a perpetrator is caught, the less harm he or she might cause.

Tips for Fraud Prevention

1) 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.

2) 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 offers 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.

3) 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.

4) 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.

5) Understand the cost of fraud. As a business owner, it’s critical that you install antifraud processes, such as segregation of duties.

6) Implement a tips hotline. Tips from employees or vendors accounted for more than 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.


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