How To Protect Your Small Business From Employee Fraud
Whenever a high-ranking executive from a prominent organization gets involved in a case of embezzlement or employee fraud, it makes headlines around the world.
These are a few more well-known examples of fraud:
- Dane Cook, an American comedian, whose brother who was his business manager and took advantage of him for about $12 million
- Girl Scout parents who were caught stealing money from their daughter’s cookie sales (average estimates of $10,000)
- Bernie Madoff, an American market maker, investor, and financial advisor, who committed the highest financial fraud in US history worth almost $65 billion
These examples might seem unlikely to happen to your company, and as a small business owner, you may believe your organization is immune to theft and fraud.
After all, who else knows and understands their employees best if not for you? In your heart of hearts, you likely believe they would never do something like embezzling money. If anything, you have a rigorous hiring manager who conducts thorough background checks, so, therefore, no potentially malicious individual could be brought on to your team.
Unfortunately, your thinking would be flawed.
Read More: 5 Ways to Improve Internal Accounting Controls and Oversight in Your BusinessStart the Conversation
What Advice Do Fraud Experts Give?
Any employee, when presented with the right set of circumstances, is capable of committing fraud.
According to the Association of Certified Fraud Examiners’ (ACFE) 2018 Report to the Nations, asset misappropriation was by far the most common form of occupational fraud, occurring in more than 89% of cases and leading to losses upwards of $110,000.
Small businesses can be especially devastated by fraud, as these companies often have fewer resources to prevent and recover from malicious acts.
Organizations with less than 100 people often must trust their employees with more information compared to businesses with many more workers with the ability to have anti-fraud controls in place.
While employee fraud prevention may not be top of mind for you, consider that the median loss for small organizations was almost twice as high as those incurred by organizations with more than 100 employees.
The ACFE reports two key reasons why small businesses have an increased risk of employee fraud:
- a lack of basic accounting controls
- a higher degree of misplaced or assumed trust
In a small to medium-sized business, the employee handling the bookkeeping is most likely to be the one to commit a crime as they can see all of the numbers, and they have your trust. However, in small businesses, there is a 29% chance that the owner or executive is the one who will commit fraud.
Read More: How To Spot Employee Fraud
How Basic Accounting Controls Can Make A Difference
Often, company leaders believe that spending an excessive amount of money on implementing complex systems of controls will save their company from employee fraud. This is not the case.
Complex controls can surely make a positive impact, but most often, starting with the basics can set you ahead of the curve.
In the ACFE 2018 report, it was noted that internal control weaknesses were responsible for nearly half of all frauds committed. Businesses that had implemented anti-fraud controls had lower losses overall, which means that these controls are working to keep the company safe.
The report also found that when businesses routinely monitor and audit their back-office functions, fraud is reduced. Even with the information found on how these controls can make a difference, only 37 percent of businesses polled had these internal controls in place.
If you would like help implementing internal controls, even at the most basic level, you can reach our team of experts at any time. Our experienced team can make recommendations based on the industry you are in, the size of your company, and the budget you have in place. Protecting your business from fraud is imperative.
What Can You Do To Protect Your Business From Employee Fraud?
Don’t wait for a fraud to occur. It is essential to be proactive and preventative and put processes in place.
Studies show that the more employees believe they will get caught, the less likely they are to commit fraud. Below we have outlined some practical tips for small business owners to reduce the risk of loss due to employee fraud:
- Don’t depend solely on external audits: External audits are usually performed once per year and months after the year ends. Even if the audit uncovers fraudulent activity, it may have been occurring for 12 months or longer before being discovered.
- Segregate accounting duties: Avoid allowing the accounting function to be controlled by a single individual and segregate accounting duties in key areas instead. Such duties and responsibilities may include:
-Recording and processing transactions
-Sending out invoices
- Routinely review financial information: If you have a small team and complete segregation is not possible, the business owner or an outside accounting firm should review the bank statements (preferably online or before the accountant has opened them) and bank reconciliations every month. 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, support, and possibly management of the in-house staff. They will start by reviewing your current accounting controls, workflows, and processes to make recommendations for improvements, implementing best practices, or even take on some of the accounting activities.
- Get fraud insurance: Purchase a bond or fraud insurance to protect your business if a theft does occur and/or have trusted employees who handle the finances bonded.
- Require your bookkeeper to take a vacation: Embezzlement and other types of fraud require a constant paper trail 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. Assuming your books are closed monthly, this is not an easy request with a small team and another reason to build a trusted relationship with an outside firm.
According to the ACFE’s 2019 Benchmarking Report, 58% of organizations have inadequate levels of anti-fraud staffing and resources. For your company, this may mean conducting background checks will not be enough to protect your company from in-house fraud.Talk to An Expert
How Can I Protect My Company?
By partnering with the Signature Analytics team, we can recommend industry-specific suggestions for your company. We help our clients put preventative controls in place and provide an appropriate level of oversight of their financial books and records to ensure accuracy.
Signature Analytics provides small and mid-sized businesses with the resources of a full finance and accounting team. We utilize a fractional accounting model so clients can effectively segregate accounting duties without having to hire additional full-time accounting staff.
To learn more about how we can help ensure your business has fraud prevention, contact us for a free consultation.