Occupational, or employee, fraud is an ongoing hazard to businesses’ bottom lines. It can take several forms, from skimming, to billing schemes, to corruption, to asset misappropriation.
In 2018, the Association of Certified Fraud Examiners (ACFE) estimated that the average business has a median loss of $200,000 due to fraud, which is almost twice as much as larger businesses.
Small organizations without antifraud controls suffer even greater overall losses. Further, the majority of small-business fraud victims don’t recover their losses.
So it’s important for business owners and management to find ways to prevent employee fraud before it can start, and reduce its impact if it does still occur.
What can you do?
While all organizations are at risk for fraud, companies with fewer than 100 employees tend be at greater risk. Why? They are more likely to have weaker internal controls due to factors such as a limited number of personnel and less management oversight.
Small business owners must takes steps to prevent and lower the risk of fraud. The sooner a fraud scheme is uncovered, the lower the loss. So, here are some ways to protect your business:
Look for Red Flags: Look for common red flags of fraudulent activity, such as an employee who is living well beyond his or her means or a worker who refuses to take time off. What appears on the surface to be dedication may, in reality, be a means to cover up fraudulent activity.
Segregation of duties: This can be very difficult for a small business owner with only a few employees, but there has to be some separation of duties. This is especially important when it comes to deposits and disbursements. Requiring two individuals for authorizing disbursements and having a separate person to prepare those disbursements. Separating duties also makes sense when reconciling bank accounts and other statements. The employee charged with making deposits or disbursements should not also reconcile the bank accounts. In small businesses, having the bank statement delivered unopened to the owner for his or her review is an effective way to deter unauthorized activities.
Lock it up: Locking away paper checks and financial statements makes it more difficult for employees to misuse them.
Fraud training: Train staff members to know what fraud is and how it can occur, as well as its impact on the business and their jobs. Trained employees will be better able to identify fraudulent actions and be equipped to do something if they suspect fraud. Having the training and discussions about common fraud schemes lets employees know that the owners and management are committed to preventing fraud.
Tip reporting: According to the ACFE report, tips were the most common means of detecting fraud. It is very important to have a secure way for employees to report suspicion of fraud. Consider installing a tip hotline where neutral third party operators can take the calls.
Lastly, be proactive: Don’t just accept that employee fraud is part of doing business — be proactive in preventing it from happening in your business. Talk with an accountant or Certified Fraud Examiner for additional ideas on how to prevent fraud.
Lisa Cross, CPA, is the shareholder in the Reno office of Piercy Bowler Taylor & Kern. She loves the Beatles and her two adorable sons. Lisa can be reached at lcross@pbtk.com for comment.
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