Eight Tips to Prevent Employee Theft and Fraud

One of the most serious threats to the success of a small business is employee theft. Misplaced trust and a failure to implement basic financial controls can lead to internal theft and fraud.

One of the most serious threats to the success of a small business is employee theft. Misplaced trust, lax hiring and supervision, and a failure to implement basic financial controls can lead to an environment that is ripe for internal theft and fraud.

The Association of Certified Fraud Examiners (ACFE) estimates that the typical business will lose an average of six percent of revenues from employee theft. The ACFE Report to the Nation on Occupational Fraud and Abuse indicates that small businesses suffer disproportionate losses because of the limited resources they have to devote to detecting fraud. And a U.S. Chamber of Commerce survey reported that one-third of business bankruptcies are due to employee theft.

Small business owners can help protect their businesses from employee theft and fraud by following these eight recommendations.

1. Create a positive work environment. A positive work environment encourages employees to follow established policies and procedures, and act in the best interests of the organization. Fair employment practices, written job descriptions, clear organizational structure, comprehensive policies and procedures, open lines of communication between management and employees, and positive employee recognition will all help reduce the likelihood of internal fraud and theft.

2. Implement internal controls. These measures are designed to ensure the effectiveness and efficiencies of operations, compliance with laws and regulations, safeguarding of assets, and accurate financial reporting. The controls for safeguarding assets and financial reporting require policies and procedures addressing:

• 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.
• Authorization controls. Develop and implement policies to determine how financial transactions are initiated, authorized, recorded, and reviewed. Internal controls will reduce opportunities for fraud.

3. Hire honest people. Of course, this is the goal of every company, and is easier said than done. But if you have weak (or nonexistent) internal fraud controls, it's even more important to make sure your employees are honest. Dishonest employees will ignore your attempts to provide a positive work environment, and search for ways to defeat even the most comprehensive internal controls. Learn more about Ethics and People Management.

Preemployment background checks are an excellent way to cut down on hiring dishonest employees. A thorough preemployment 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.

4. Educate your employees. You need to inform your employees about your policies and procedures related to fraud, the internal controls in place to prevent fraud, the organization's code of conduct and ethics policies, and how violations of these policies will be disciplined. Every employee should sign a form to verify receipt of this material. Employees should receive annual training on these topics and on the definition of what's considered fraudulent behavior, and sign an acknowledgement each time. Read more about Preventing Crime and Violence in the Workplace.

5. Implement an anonymous reporting system. Every organization should provide a confidential reporting system for employees, vendors, and customers to anonymously report any violations of policies and procedures. Promote and encourage the use of the reporting system whenever possible.

6. Perform regular - and irregular - audits. Every company should have regular assessments, but random, unannounced financial audits and fraud assessments can help identify new vulnerabilities, and measure the effectiveness of existing controls. It also lets employees know that fraud prevention is a high priority for the organization.

7. Investigate every incident. 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.

8. Lead by example. Senior management and business owners set the example for the organization's employees. A cavalier attitude toward rules and regulations by management will soon be reflected in the attitude of employees. Every employee - regardless of position - should be held accountable for their actions.

Implementing these recommendations can dramatically reduce the opportunity for employee theft and protect the assets of your business. 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 reoccurrence.

- Larry Cook

Larry Cook is certified fraud examiner and certified protection professional with more than 25 years of fraud-investigation and assessment experience.

Find additional employment law information and tips on OSHA regulations at AllBusiness.com.

Copyright © 1999 - 2007 AllBusiness.com, Inc. All rights reserved.