Managing Risks of Fraud and Embezzlement

Eight Tips to prevent Employee theft

One of the most serious threats to the success of a small business is employee theft.

Why do employees steal from their employers? Is it lack of trust, poor hiring decisions and supervision? Is it a failure to implement basic financial controls that can lead to a workplace that almost encourages internal theft and fraud?

A typical business will lose an average of 5 percent of income from employee theft. Small businesses suffer disproportionate losses because of they do not always have the resources to devote to detecting fraud.

The following tips can assist small business owners to protect their businesses from employee theft and fraud.

1. Create a Positive Work Environment

So many employers forget that happy people produce more. They tend to be more loyal to the company. Why would they want to steal from a company they respect and love?

What is needed is often a positive work environment. One that encourages employees to follow established policies and procedures. For everyone to always act in the best interests of the organisation. Rules that stay consistently followed and respected by all. Employers that inspire and encourage self-actualisation. That implement fair employment practices, written job descriptions, clear organisational structure, open lines of communication between management and employees, and positive employee recognition. These will all help reduce the likelihood of internal fraud and theft.

2. Implement Internal Controls

Internal controls are measures that ensure the effectiveness and efficiencies of operations, compliance with laws and regulations, safeguarding of assets, and accurate financial reporting. These policies and procedures should address the following points.

  • Separation of duties:No employee should be responsible for both recording and processing a transaction.
  • Access controls:Access to physical and financial assets and information, as well as accounting systems, should be restricted to authorized employees.
  • Authorisation controls:Develop and implement policies to determine how financial transactions are initiated, authorised, recorded, and reviewed.

3. Hire Honest People

Not the easiest thing to do and judging most people is often subjective. When we try to be positive it usually includes all the people we meet. As a result many of us have mis-judged staff we have recruited. However generally dishonest employees will usually ignore any attempts to provide a positive work environment, and they'll search for ways to defeat even the most comprehensive internal controls.

Recruitment is an Art and comes with careful skill and judgement. Usually it is only after really getting to know a person, you can make a true judgment about them.

  • So give as many interviews as you can with the same person.
  • Obtain Criminal and Pre-employment background checks are an excellent way to cut down on hiring dishonest employees.
  • Check each candidate thoroughly, not just with the most recent employer, but the ones before that too .

A thorough pre-employment background check should include:

  • Criminal history for crimes involving violence, theft, and fraud
  • Civil history for lawsuits involving collections, restraining orders, and fraud
  • Driver's license check for numerous or serious violations
  • Education verification for degrees from accredited institutions
  • Employment verification of positions, length of employment, and reasons for leaving
  • Check Social Networking sites and Search Engines like Google or Bing for an alternate perspective.
  • Check on their interests. Some can indirectly lead to gambling and drug addiction, or lifestyles that need wealth to maintain.


4. Educate Your Employees

Continual development of staff is one way to help create a positive environment. This involves training sessions or meetings. During this time inform your employees about your policies and procedures relating to fraud.

Explain all the internal controls currently in place to prevent fraud, your organisation's code of conduct and ethics policies, and how violations of these policies will be disciplined. As part of the positive environment you are seeking to maintain, open up for suggestions on improvement and reiterate that these procedures are for all their protection. Then to make sure it is clear to all, each employee should sign a form to verify receipt of this information.

Employees should receive annual training on these topics and on the definition of what's considered fraudulent behavior, and sign an acknowledgement each time.

5. Create an Anonymous Reporting System

Every organization should provide a reporting system for employees, vendors, and customers to anonymously report any violations of policies and procedures.

If anything it creates an avenue of communication and can be combined with a suggestion system.

Promote and encourage the use of the reporting system whenever possible, and take the reports seriously. The fact that they are anonymous does not mean they are any more or less credible; they should be investigated just as thoroughly as any reported misconduct.

However, on the other hand do not make any hasty decisions. They have been used by dis-gruntled employees to undermine or parlay blame to another. However, if used appropriately, they can alert you to issues that a scared or pressured employee would not otherwise want to raise personally.

6. Investigate Every Incident

There is no point in implementing a procedure if it is not going to be acted upon. Investigate every incident and report, no matter how large or small. A thorough and prompt investigation of policy and procedure violations, allegations of fraud, or warning signs of fraud will give you the facts you need to make informed decisions and reduce losses.

7. Perform Regular (and Irregular) Audits

Every company should have regular assessments. However the use of random, unannounced financial audits and fraud assessments can help identify new vulnerabilities, and measure the effectiveness of existing controls.

Audits also let employees know that fraud prevention is a high priority for the organisation, and reminds any possible wrongdoers that they could easily be caught. It may also make them uncomfortable enough that they may stop or leave the company.

8. Lead By Example

Senior management and business owners should remember that their employees watch and usually know everything they do. They need to set an example for the organisation's employees. In fact how they operate sets the tone for a positive work environment and wins them respect from employees.

A cavalier attitude toward rules and regulations by management will soon be reflected in the attitude of employees. All employees -- regardless of position -- should be held accountable for their actions.

In conclusion

Implementing these recommendations can dramatically reduce the opportunity for employee theft and protect the assets of your business. It can also boost productivity with a positive and confident environment . This can also engender loyalty amongst staff and lead to less employee turnover.

If you suspect fraudulent activity by an employee, seek professional assistance to conduct the investigation. Determine what's necessary to protect your business and prevent a recurrence. You have a duty of care to all stakeholders in the business to reduce the chance of being a victim of fraud, which is happening too much in the business world. 

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