Preventing Employee Fraud in Small Business

Employee fraud is when an employee knowingly lies to, steals from or deceives their employer to make personal gains. While employee fraud can occur in organisations of all types and sizes, smaller businesses could be more at risk than larger corporations, often due to a lack of basic accounting controls and misplaced or assumed trust.
While employee fraud can occur in several forms, the following are the most common types:

• Asset misappropriation—This type of fraud accounts for the vast majority of fraud schemes and includes cheque fraud, theft of money, inventory theft, payroll fraud and theft of services.
• Bribery and corruption—These methods include kickbacks, bribes to influence decision-making, manipulation of contracts or substitution of inferior goods.
• Financial statement fraud—This type of fraud is the rarest and costliest. It entails manipulating financial statements to create financial gains for an individual or entity.

It can be difficult for employers to spot employee fraud. Therefore, it’s critical for small businesses to be able to identify employee behaviour and other signs that may be indicative of fraud occurring within the organisation. Employers should look out for the following:

• An employee living beyond their means—If an employee’s lifestyle suddenly doesn’t match their salary, this could indicate fraud.
• An employee working longer hours than usual—Coming in early, staying late, working on weekends, or not taking sick leave or annual paid time off could be signs of employee fraud. Fraudsters often avoid taking time off because they don’t want people to review their work. In addition, fraudulent activities often occur outside of regular business hours, when the employee is less likely to get caught.
• An employee experiencing financial difficulties or family issues—An employee who is going through financial problems or experiencing family issues might be more inclined to commit fraud to lessen their stress.
• An employee being secretive—If an employee is reluctant to share their processes or have someone review their work, they may be committing employee fraud.
• An employee who works in a position to commit fraud—Often, employees who have worked at a business the longest are the most likely to commit fraud. This could be because they have more trust, know the company’s weaknesses or can control what appears on paper.
• Book debts that are suspicious or inconsistent— Excessive or unexplained cash transactions, unreconciled bank account statements, sudden activity in previously inactive accounts, or an unusual increase in expenses, supplies or employee reimbursements can all be indicative of employee fraud.

Employee fraud can be particularly devastating for small businesses, as they often have fewer resources available to help them recover from malicious acts. As such, it’s vital for small businesses to take the following action to prevent employee fraud:

• Create a tip hotline. Whistle blower tips are the most common way employee fraud is discovered. 
• Conduct internal audits. Regular audits may allow employers to discover any misconduct and deter employees from committing fraud in the first place.
• Perform background checks. 
• Implement internal controls. Such as clearly defining what constitutes fraud in the employee handbook, setting up an anonymous hotline and performing monthly bank reconciliations.
• Create a culture of integrity. 
• Purchase insurance. Insurance, particularly commercial crime insurance, can help small businesses protect themselves from business related financial losses.

By taking precautions and implementing internal controls, small businesses can effectively limit their risk of employee fraud. For more small business insights and risk management guidance, contact us today.