Five Ways Businesses can Reduce the Risk of Employee Fraud

Every year small businesses suffer financial losses from fraud.  These losses average almost $100,000 per event, and the vast majority of the people committing the fraud are employees of the business. That is discouraging news to small-business owners. All of us entrepreneurs have to trust the people we hire to help run our businesses. There are five ways we can manage that trust and make sure it is well placed.

• Conduct Background Checks on Potential Employees

When we hire employees, we look at their resume to make sure they have the right educational and job experience. We may call their references, but all too often we don’t. Even fewer of us call the former employers to try to find more about the employee. Many people over-inflate their importance on their resumes, and no one is surprised by that fact. Unfortunately, there are many people who completely lie on their resume. They just play the odds that potential employers won’t take the time to make a phone call.

Conducting a background check is the best way to know who your potential employee truly is. At a minimum the check should cover prior criminal, civil, liens, foreclosures and bankruptcies. Finding out that an applicant may have criminal convictions for violence or fraud; have judgements against them in civil cases; or have filed recent bankruptcies can let you know if the potential employee might be likely to be a problem at your business.

Background checks can go way beyond the basics. They can include social media, negative news, sanctions and licensure discipline. They can also include interviews with the candidates past associates, employers and neighbors.

• Create a Culture and Code of Ethics

The ethical makeup of a business begins at the top, with the owner. All employees watch the owner. They see if he cheats his customers, cheats his vendors or cheats his employees. With a boss like that the employees learn that fraud and corruption is acceptable in that business. Simply put, if your employees see you cheat and steal then they’ll cheat and steal from you.

An owner who acts with integrity in all matters, both personally and professionally demonstrates to his employees he will not tolerate any cheating or fraud.

Taking the owner’s ethics and codifying them also shows the employees that any unethical action will not be tolerated. It should be written down and distributed to all employees. It should be simple and to the point.  Displaying signs with this code throughout the business haves a significant positive impact on employee conduct.

• Ensure the Division of Responsibility

Telling a business owner they need to separate the functions of accounting from those of check writing, revenue receipt, and expense payments sounds simple, but many owners don’t want to hear it. Many of us small-business owners hire employees on a shoestring. We want to get the maximum amount of value from each employee we hire. We do that by giving them enough logical responsibilities to keep them busy. It seems natural to let our accountant and/or bookkeeper to handle all financial matters, but it can cause trouble down the road.

Someone else besides your accountant or bookkeeper should write the checks and receive the revenue. That way no one can issue a fraudulent check and then “cook the books” to hide the fraud. In my business I handle the actual receipts and expenditures. My bookkeeper handles the accounting. She keeps me organized and financially pure. I keep her safe from the potential temptation to steal money.

The same holds true in the inventory and shipping/receiving departments. The people receiving and shipping inventory or materials should not be the ones responsible for the accounting of those items.

• Stay Involved

Business owners are busy. They are busy dealing with customers, trying to get new customers, looking for operational efficiencies and a million other things. Too often they’ll forget about the day in day out operations that keep the business running.

As a business owner you need to randomly spot check your employees’ work. You need to know why they are doing their functions. You need to understand their jobs as well as they do. You need to know your customers and your vendors. You need to visit your employees in their work areas to see how their personal lives are going. (How are the children, the spouse, vacation plans, etc.)

You also need to at a minimum, review your bank statements, whether they are mailed to you or on online. If they are mailed to your business, they should come to you unopened. A full reconciliation to the checkbook would be best, but if that challenges you, at a minimum review the deposits and withdraws in your account to make sure they make sense.

• Create a Safe Reporting Mechanism

With most cases of fraud committed by employees, their co-workers were suspicious of the fraudster. They heard them complaining about their bosses, they saw them spending money on lavish expenses, they saw their overly friendly relationship with vendors or customers, they saw their defensiveness to any questions about their activities. Owners need to make sure the witnesses have the ability to inform the management of their suspicions without the fear of retribution.

That can be set up with a “fraud hotline” or something as simple as a “fraud” email address, or a “suggestion box.” The biggest discouragement that witnesses to employee theft say keep them from coming forward was the fear of alienation or retribution. Whatever method you use, you must try to protect the witness’ identity from his co-workers and the fraudster.

Putting these simple steps in practice in your business will not only protect your business from employee fraud, but it will make the workplace a happier place.