Does your company have procedures and processes in place to prevent fraud or detect it if it occurs? Most small businesses feel ill-equipped to fight employee fraud and in many cases they are. However, recognizing that the threat exists provides a great first step to preventing and detecting a fraud. So what is fraud? Fraud occurs when a person deliberately practices deception in order to gain something unlawfully or unfairly. The top four types of small business frauds are corruption, billing schemes, check tampering, and skimming. The longer a fraud goes undetected the greater the loss will be. Fraud can occur when an employee faces tremendous financial pressure (gambling debts, sick child), perceives an opportunity (to take advantage and not get caught), and rationalizes it (by saying “I will pay it back”, “I am not appreciated”). The first incident may be for a small amount, but once the employee realizes they have gotten away with it, the amounts and frequency increase.
The Association of Certified Fraud Examiners’ (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse reports that 30% of fraud cases occurred in small businesses (those with fewer than 100 employees) and 60% of those victims did not recover any of their losses. Even worse, they suffer the same median fraud loss ($150,000) as those with greater than 10,000 employees, causing a much greater impact to the business. Small businesses often lack the resources to prevent a loss or detect it if it occurs. They have a smaller number of employees, less sophisticated processes or internal control procedures, less management review, and a misplaced trust of employees. These can allow employees too much access and not enough oversight. Many business owners find out much too late that their loyal employees may commit fraud or steal from the company. Employees that are highly trusted are able to commit the crimes because management trusts them so much. It is often the person you least suspect that is the one that commits the crime. SCORE (a nonprofit association dedicated to helping small businesses) identifies 10 ways to prevent employee theft.10 ways to help prevent employee theft:
- Know your employees. Be alert to key indicators of potential theft such as sudden devotion to working late; lifestyles well above salary levels; objections to procedural changes; drugs and alcohol abuse; evidence of compulsive gambling, persistent borrowing or bad check writing.
- Supervise employees closely.Not surprisingly, studies show that when supervision is lax, theft and fraud rates go up. This doesn’t mean looking over their shoulder every minute. But it does mean checking what they do. It’s also wise to have more than one person looking out for your money.
- Use purchase orders.The payment, receipt and preparation of purchase orders should be separate functions and handled by different individuals. Use serially pre-numbered purchase orders and always verify incoming orders.
- Control cash receipts. Use serially pre-numbered sales slips and conduct weekly audits. Balancing of sales slips and register receipts should be done by someone other than the sales clerk.
- Use informal audits. Make unannounced internal audits and have a yearly audit performed by an outside firm.
- Install computer security measures.Understand your computer systems and software, and how they might be used to divert money or inventory. Restrict access to computer terminals and records. Periodically change entry codes and check regularly to ensure that security procedures are in effect.
- Track your business checks. Always use pre-numbered checks, with amounts and payees typed or written in permanent ink. Lock blank checks and a signature machine, if you have one, in a secure place.
- Manage inventory and use security systems.Separate receiving, store keeping and shipping functions. Physical inventories should be done annually.
- Beware of accounts receivable by making mail-opening and posting of customer receipts separate functions.
- Provide a way for employees to report theft or fraud by co-workers.