Employee fraud is more common in small businesses – Are you protected?

Whenever a new high-profile case of embezzlement and fraud perpetrated by a high-ranking executive from some prominent organization occurs, it makes headlines all across the world.

As a small business owner, you probably think your business is immune to fraud for various reasons because:

  • You know all of your employees so this will never happen to you.
  • You are close friends with all of your employees so this will never happen to you.
  • Your employees are members of your family so this certainly will never, ever happen to you.

And unfortunately, you would be wrong.

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. In fact, the median loss for small organizations (those with fewer than 100 employees) was the same as those incurred by the largest organizations (those with more than 10,000 employees). While employee fraud prevention may not be top of mind for you, consider this: smaller organizations rarely recover any losses, meaning the impact can be substantially greater for smaller businesses than to larger corporations.

Image attribution: Association of Certified Fraud Examiners

The ACFE describes two key reasons why small businesses have an increased risk of employee fraud:

1) A lack of basic accounting controls which contributes to bad data.

2) A greater degree of misplaced or assumed trust.

In a small to medium-sized 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% 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. Taking a proactive approach is critical to employee fraud detection. 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. External audits are usually performed once per year many months after the year has ended and among the least effective controls in combating occupational fraud. Therefore, even if the audit does uncover fraud, it may have been occurring for 12 months or longer before it is even 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 may include:
    • the recording and processing of transactions
    • sending out invoices
    • collecting cash
    • making the bank deposits
  • Routinely review financial information. If you have a very small team and segregation is not possible, 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 and support of the in-house staff. They will start by reviewing 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 a 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?

Our team ensures that 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.

Signature Analytics provides small and mid-sized businesses with the resources of a full finance and accounting team on a fractional basis allowing our clients to achieve an effective segregation of accounting duties without having to hire additional full-time accounting staff until the time is right.

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