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You Can Do More Than Hope it Never Happens to You: Tips for Preventing Employee Fraud

You Can Do More Than Hope it Never Happens to You: Tips for Preventing Employee Fraud

As a small business owner, you may think you are impervious to employee fraud. The carefully developed culture of many small businesses is one of “family.” You don’t steal from your family, do you?

Unfortunately, employee theft is a very real problem for small businesses. The Association of Certified Fraud Examiners (ACFE) reveals that small businesses (those with 100 or fewer employees) are the most common victims in cases of fraud.

Small business frauds and theft occur at nearly 32 percent of small companies, the highest rate of any size business group. The average loss per company for those cases is a whopping $147,000. The most common crimes are outright theft (larceny), diverting funds (skimming), fraudulent disbursements and the embezzlement of supplies and inventory.

The National Federation of Independent Business (NFIB) estimates that an employee is 15 times more likely to steal from an employer than a non-employee is. The average employee thief has worked for the company for four to five years and is a first-time offender.

The main reason small businesses are vulnerable lies right in that family atmosphere. Small businesses often operate without the system of internal controls that larger companies have in place. Trusted employees are put in positions with little or no oversight.

The sad reality is that almost anyone might steal from your company if presented with pressure to do so, the rationalization for doing so and the opportunity to do so. As a small business owner, you can take direct steps to safeguard your assets by limiting that opportunity.

Hire Wisely

Many small business employees handle cash and valuable merchandise and have direct access to sensitive data. As part of your hiring process, be sure to contact your candidates’ references from former employers and supervisors. Ask for information about why the person left the previous position.

After checking those references, perform background checks on the candidate. State laws vary on your rights as an employer to check an applicant’s criminal background, so visit your local Equal Employment Opportunity Commission (EEOC) office or for guidelines.

During the interview and orientation process, communicate your standards for employee conduct.

Have a Security System in Place

Don’t make it easy for your employees to steal from you. With some simple, professional measures, you will demonstrate that you value honesty and that you require accountability. Develop an internal control system that includes:

  • Purchase orders. Different employees should handle the payment, receipt and preparation of purchase orders. Use pre-numbered purchase orders and be sure to verify incoming orders.
  • Cash receipts. Also, use pre-numbered sales receipts. Someone other than the sales clerk should balance sales slips and register receipts.
  • Informal audits. Perform unscheduled internal audits and hire an outside firm to conduct an annual audit.
  • Computer security measures. Use updated systems and software that restrict access to sensitive data. Change passwords and entry codes periodically.
  • Business checks. Use pre-numbered checks, with information typed or written in permanent ink. Use financial software to help you track checks and keep blank checks and your signature machine in a secure location.
  • If possible, separate receiving, store keeping and shipping functions and install security devices to monitor merchandise and inventory.

Recognize Possible Warning Signs

Many victims of employee fraud realize they ignored some red flags before the crime occurred. Here are some potential indicators of an employee theft situation:

  • Change in working hours, such as working late or working early without explanation.
  • Lifestyle change that is above salary level
  • Suspected drug or alcohol abuse
  • Objections to financial or inventory procedures
  • Not taking vacation time
  • Unexplained protectiveness of workspace
  • Other unusual behavior

Treat Employees Well

One of the best ways of protecting your business is by having an open-door communication policy with your staff. According to the ACFE, it takes an average of 18 months for an employer to catch an employee who is stealing from the company. Most cases are brought to the employer’s attention by another employee or are revealed by accident.

Let your team members know they can always come talk with you if they have a problem or if they suspect a colleague has a problem.

Handle Any Suspicions Carefully

If something does not feel right in terms of an employee’s actions or behavior, trust your instincts. However, you need to be cautious about making any accusations. A false accusation could land you in legal trouble.

First, try to verify your suspicions, determining the extent of the problem. If you can confidently identify an employee who is responsible, you need to consider whether you want to terminate the employee, take legal action or work with the employee on a reimbursement plan.

Keep any conversations with the employee free of accusations and state facts, not opinions. If it is a large or complicated issue or if you just need advice on the matter, consult your attorney.

Cases of employee fraud present uncomfortable and stressful situations for everyone involved. You can’t completely prevent it from happening it to you, but with awareness and with preventative measures in place, you can go a long way to reducing its impact on your livelihood.

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by Tricia Drevets // Regular Contributor to Businessing Magazine. Tricia Drevets is a freelance writer who specializes in business and communication topics. A community college speech and theater instructor, Tricia lives in beautiful Southern Oregon.

Opinions expressed by contributors are their own.