Employee Fraud is More Common in Small Businesses – Are you Protected?

The news is full of high-profile stories of embezzlement and fraud perpetrated by high ranking executives in some of the nation’s largest organizations. You might think as a small business owner that those stories don’t pertain to you. You might say to yourself, “I know all of my employees and they would never do something like that”. Maybe you have personally hired every one of them and consider them close friends. Or maybe you even have family members in your organization and think it is inconceivable that they would ever steal from you.

If this is how you think, you should think again.

What are the experts saying?

According to the Association of Certified Fraud Examiners’ (ACFE) 2016 Report to the Nations, asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases. Small organization’s (those with fewer than 100 employees) median loss was the same as that incurred by the largest organizations (those with more than 10,000 employees). This loss is more likely to have an impact on the smaller organizations who often times do not recover any losses.

The ACFE’s Small Business Fraud Prevention Manual describes two key reasons small businesses have an increased risk of employee fraud, 1) a lack of basic accounting controls, and 2) a greater degree of misplaced trust.

In a small business, it is typically the one-person accounting department who is found to be the thief. In other words, the person you least suspect is usually the one who commits the crime.

Background checks and hiring practices themselves are not enough to protect your business from employee fraud. In fact, according to the ACFE’s 2016 Report, the vast majority of occupational fraudsters are first-time offenders with only 5.2 percent having been charged or convicted of a prior fraud-related offense.

What can you do to protect your business from employee fraud?

Below are some practical tips for small business owners to reduce the risk of loss due to employee fraud:

  • Be proactive. Do not wait for a fraud to occur before putting processes in place to prevent it. Studies have shown that the more employees believe they will get caught, the less likely they are to steal.
  • Do not depend solely on external audits. They are among the least effective controls in combating occupational fraud and are usually performed once per year many months after the year has ended. Therefore even if the audit does uncover fraud it may have been happening for 12 months or more before it is discovered.
  • Segregate accounting duties. At all costs, avoid allowing the accounting function to be controlled by a single individual. Segregate accounting duties in key areas, such as the recording and processing of transactions, sending out invoices, collecting cash, and making the bank deposits.
  • Routinely review financial information. If you have a very small team and therefore segregation is not possible, at a minimum the business owner or an outside accounting firm should review the bank statements—preferably online or before they have been opened by the accountant—and bank reconciliations on a monthly basis. Vendor payments should also be periodically reviewed. A common scheme is to set up fictitious vendors and manipulate bank statements with photo editing software before printing and filing them for review.
  • Ensure accounting oversight. Hire an outsourced accounting firm to provide oversight of the in-house bookkeeper, review your accounting controls in order make recommendations for improvement, or to take on some of the accounting activities.
  • Insure your business. Purchase a bond or fraud insurance to protect your business if a theft does occur and/or have employees who handle the finances bonded.
  • Require employees to take vacation. Embezzlement and other types of fraud require a constant paper trail cover-up in order to go undetected. Therefore, business owners should insist that employees who perform the company’s accounting/bookkeeping duties take a vacation every year and designate a backup person to cover their responsibilities during that leave. Ideally, the vacation should be at least a week long and occur over a month-end when the books are being closed.

How can we help?

Signature Analytics provides small and mid-sized businesses with the resources of a full finance and accounting team on a fractional basis, so our clients achieve an effective segregation of accounting duties without having to hire additional full-time accounting staff. We ensure that all of our clients have preventative controls in place. We provide an appropriate level of oversight for the company’s financial books and records, helping to ensure accuracy.

To learn more about how Signature Analytics can help ensure your business is protected from employee fraud, contact us for a consultation.