How to Protect Your Company From Employee Fraud

As much as you would like to think it can’t happen at your company, employee theft can and does occur at companies of all sizes and sectors. From fictitious vendors and inflated expense reports to rigged bidding processes and vendor kickback, employees can be quite creative when their intent is to commit fraud.

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It is critical to set the tone from the top by emphasizing that employees must abide by company ethics rules. There are certain proactive steps you can take to help prevent employee theft at your company before it becomes a problem.

Employee Manual

A properly prepared employee manual should clearly spell out inappropriate employee behavior and provide guidelines as to proper procedures that employees are to follow. For example, how to request expense reimbursement or the proper use of company credit card.

Segregation of Duties

Incompatible job assignments (i.e., preventing one person from having both access to cash and the responsibility for reconciling the bank statement) could encourage employees to help themselves to the company’s cash. Structure job assignments to minimize opportunities to embezzle funds. Establish processes that require critical steps to be approved by a second individual.

Bank Statements

Small business owners should have corporate bank statements and copies of checks mailed to their personal residence. A quick review could uncover irregularities. At a minimum, employees with access to the company’s bank accounts should be given the impression that the owner has taken the time to review the bank statements each month. Do not give an employee an unopened bank statement—doing so would defeat the purpose of having the statement mailed to the owner’s residence.

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Job Description

Each employee should have a detailed job description. This helps eliminate incompatible job assignments and makes employees accountable for any breakdowns in internal controls.

Mandatory Vacation

Make it mandatory for each employee to take at least one week of vacation annually. This will require another employee to fill that role for a short period, which will create an opportunity to observe any irregularities that the embezzler was attempting to cover up.

Insurance

Each employee that is in a position of trust or has access to cash should be bonded.

Background Checks

At a minimum, prior to hiring accounting and financial personnel, perform a criminal background check and verify references.

Observation

Observe whether any employees are living beyond their means, such as driving luxury vehicles, moving to a more affluent neighborhood, wearing expensive clothes or jewelry, taking exotic vacations or spending excessively on luxury items. These are red flags---ignore them at your own peril.

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Fraud Hotline

Implement an anonymous hotline as a way for your employees to report unethical or illegal activity at any time.

Report to Insurance Company

Report fraud claims to the insurance company in a timely manner in order to adhere to the provisions of your policy and to prevent the insurance company from using this as a reason to invalidate potential payments for losses.

Report to Authorities

Pursuing criminal charges will deter other employees and could result in a recovery of the theft. Some fidelity policies require reporting the fraud to the authorities prior to paying on any claim.

These are some simple suggestions to deter employee theft at your company. Remember most employee theft requires motive/pressure, rationalization and opportunity:

• Pressure = Financial needs (e.g. medical bills, gambling habit, divorce, peer pressure)
• Rationalization = “I will pay it back” or “I don’t get paid enough”
• Opportunity = Weak internal controls

Most business owners don’t believe their employees will embezzle funds from their company.  Instead of hoping employee fraud doesn’t occur, proactively establish processes that reduce the risk of fraud occurring even if an employee wants to steal from the company.

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Remember, many times it is your most trusted employee that steals from you because you have provided the opportunity.