Employee Fraud: How to Scout It and Stop It

Every year, companies lose an average of 5 percent of their revenue to fraud, according to the Association of Certified Fraud Examiners – and small businesses, with fewer control systems, are the most vulnerable.

The investigation software i-Sight lists a whopping 41 types of employee fraud and theft that fall into six major categories:

  1. Asset misappropriation. This is simply the theft of company assets, such as inventory, services or cash. It extends to less straightforward transactions, such as workers’ compensation fraud (fabricating or exaggerating an injury) or misuse of a company car.
  2. Vendor fraud. This refers to potential collusion between a vendor and an employee. Vendor fraud can manifest through bribery and kickbacks, overbilling or bid-rigging.
  3. Accounting fraud. Often committed by employees who run the books with no supervision, this is the manipulation of accounting data to hide or facilitate stealing. Examples include embezzling, creating fake suppliers or reimbursing oneself for personal purchases.
  4. Payroll fraud. This is a major risk; according to the Association of Certified Fraud Examiners, it occurs in 27 percent of businesses and lasts an average of three years. One common tactic is timesheet fraud – padding hours.
  5. Data theft. Employees can steal trade secrets, customer records or personally identifiable information, compromising revenue or exposing the company to litigation.
  6. Bribery and corruption. The stuff of horrific headlines, this category includes bribery to public officials, shell company fraud schemes or use of counterfeit materials.

How can you scout and prevent employee fraud?

i-Sight recommends watching for these red flags:

  • Employees with a lavish lifestyle that doesn’t match their salary;
  • Employees who are always at the office – avoiding vacation, staying late and working on weekends – or who hesitate to share their job functions;
  • Employees who draw complaints or tips from others;
  • Employees who don’t feel the rules apply to them;
  • Inventory shortages; or
  • Large number of write-offs in accounts receivable.

And Entrepreneur recommends four preventive controls:

  • Establish a code of conduct;
  • Set up organizational checks and balances – don’t let one person control all financial aspects of the business;
  • Institute policies and procedures for accounting processes such as payroll; and
  • Watch employees’ behavior.

Our bottom line: Trust your gut, and emphasize integrity to all employees. If all employees feel responsible and accountable, they will be your first line of defense against fraud; the Association of Certified Fraud Examiners says nearly 40 percent of frauds are detected through employee tips.

Do you need help with a code of conduct or payroll protocols? Contact us today.

Photo by GotCredit