Identifying and Preventing Employee Fraud

According to the Association of Certified Fraud Examiners, businesses lose 5% of their annual revenue to employee fraud and abuse. Businesses with fewer than 150 employees—are the most vulnerable to employee fraud. They lack the resources to absorb losses.

As well, most employers trust the people that they work with every day. A small business can feel like family, and discovering fraud can have an emotional and morale impact. As uncomfortable as it may feel to think about fraud, knowing where to identify it and how to prevent it can protect your business’s future.

Most Common Areas of Employee Fraud

To identify employee fraud, you need to know where it’s most common. This will also help you put checks and processes in place to prevent fraud. 

Check tampering is one place where a fraudulent employee may skim off the stop. They could steal blank checks and forge amounts and signatures on them. It’s also easy to alter a number by shifting a decimal point or adding a zero.

If you make a habit of leaving a few signed, blank checks over the weekend for the restaurant manager, they could take advantage of this. One of the best ways to prevent this type of fraud is to leave your business checkbook locked up, and never sign blank checks. Another way is to shift all your payments to online, automatic payments that can’t be altered.

Your bi-weekly or monthly payroll processing offers another opportunity for fraud. Your bookkeeper could set up and pay a fake employee. They could direct a paycheck to the wrong bank account, or even raise a pay rate without authorization.

How closely do you watch your accounts payable? Billing schemes allow some fraudsters to line their pockets by mocking up and paying fake invoices. Or, they could set up a dummy vendor in your system.

Employees other than your payroll supervisor or accounts payable clerk also have opportunities for fraud. Your salespeople could try to sneak unauthorized expenses past the bookkeeper - such as a hefty bar bill when company policy doesn’t reimburse alcohol-related expenses. Or, they could submit fake expenses that they never incurred.

Preventing Employee Fraud

Keep a close eye on your financial statements. You should review them quarterly, at a minimum, but also performing unannounced spot checks can keep people honest. If they never know when you’re going to request a bank reconciliation, they’re less likely to take the risk of writing a fake check.

If you see unusual spikes, or activity, ask questions. In larger corporations, senior management often reviews a monthly flux explanation file which explains large movements. This could be beneficial to a smaller company.

As often as you feel is necessary, review a list of your vendors and look for anything unusual. Pay particular attention to any new vendors, especially if you’re concerned about a jump in accounts payable. If you’re not comfortable performing this analysis yourself, ask your accountant or tax professional about their fraud and audit services.

Another method of preventing fraud is segregating duties. No one employee should have end-to-end control over payments.

You could set up a process where all invoices for payment go through a supervisor for review. Establish a policy where two signatures are required for payments over a certain amount. Or, have a different person set up all new employees and vendors than the bookkeeper who cuts the actual checks.

Education is also key to preventing fraud. The salesperson could have submitted the expense reimbursement in good faith. Conduct anti-fraud training on at least a yearly basis, if not more often.

Employees who know what to look for can help you find fraud perpetrated by someone else in your organization. If they’re aware of policies and procedures to prevent fraud, it prevents innocent mistakes. And it’s a less confrontational way to let your employees know that you do pay attention.

What If You Find Fraud?

You must act swiftly and decisively if you find fraud, but before you fire an employee make sure that you have fully documented their misbehavior and have proof.

In most cases, it’s not worth the time or money to prosecute small thefts. Letting the person go without a reference may be the easiest way to resolve the problem. Check local laws and involve your human resources department in whatever actions you take, as this protects you from a potential lawsuit.

In the case of large amounts, you may need to prosecute. This could involve working with an accountant, human resources, and legal professionals. In many cases, it’s best to speak with them before the employee is aware that you’ve found their fraud.

Employee fraud is a difficult, and costly, topic. It can feel like, and often is, a betrayal. Prevention is key, but it’s unrealistic to think that you could be in business for years without at least one instance where it rears its ugly head. Knowing how to handle it minimizes its impact and helps you move beyond the situation faster.