Preventing Workplace Fraud

The Association of Certified Fraud Examiners’ (ACFE) 2012 Report to the Nation reports that the typical business loses 5% of its revenues to fraud each year. Can you afford to lose 5% of your business revenues annually?

The ACFE determined that fraud in the workplace (occupational fraud) is a significant threat to small businesses. The smallest organizations in their studies suffered the largest median losses. This is because small businesses generally have fewer anti-fraud controls than do large businesses, and a lack of sufficient fraud controls makes these businesses vulnerable to fraud.

So what’s a business owner to do?

1. Don’t assume that because an employee has worked for you for a long-time and is a trusted employee that they would not commit fraud. Most people committing occupational fraud are first-time offenders with clean employment histories. Over half of workplace frauds are committed by employees with six or more years of tenure with the company. Furthermore, the longer a fraudster has been with a company and the higher their position, the larger the losses.

2. Know what the most frequent fraud schemes are. The ACFE reports the most popular asset misappropriate schemes are (in order of frequency, per their study): fraudulent billing schemes, noncash misappropriations (such as stealing inventory), skimming, expense reimbursement fraud, and misappropriation of cash on hand.

3. Make sure you have policies and procedures in place to help deter these fraud schemes and help detect fraud should it occur. One of the most effective ways to deter and detect fraud is regular review of checks written on the company’s bank account. Many banks no longer provide cancelled checks with their bank statements, but the cancelled checks can usually be reviewed online. Review these checks regularly noting:

  • The payee-is this a vendor or payee whose name you recognize?
  • The amount-is the amount being paid to the individual reasonable? Take the time to trace some of the payments to invoices received from the vendor or expense receipts submitted by employees.
  • The check signer-is the person who signed the check authorized to do so? Is the signer different from the payee? No employee with signature rights should write a check to themselves or to “cash.”

Also, check the bank statement for any unauthorized transfers or cash withdrawals. This review is one that should be performed by the business owner or someone familiar enough with the business to recognize misappropriations. It should not be delegated to an employee with check signing ability, ability to access the accounting system, or an employee who authorizes expenditures.

4. Review charges by employees to corporate credit cards and insist on receipts. These receipts should be matched to the credit card statements and the receipt should be itemized. Often stores give us the receipt with the total and our signature and, in addition, an itemized receipt that shows what was purchased. Both those receipts should be kept to support the charge. Make sure employees with credit card privileges know what they can and cannot purchase with the credit card.

5. Consider creating a system by which employees can make anonymous tips. Something as simple as a locked suggestion box would work. The most prominent method by which fraud is detected is through tips.

6. Set a good example. We have seen numerous situations where an employee misappropriated assets through fraudulent expense claims, credit card abuse, and outright theft of cash because they saw the business owner committing fraud. Your employees need to know that you run an honest business, follow good accounting principles, and adhere to tax laws. If they work for an employer who plays fast and loose with the business’ cash, the accounting records, and tax laws, it is easier for them to justify their own fraudulent behavior.

By following these six steps, you can make your business less susceptible to occupational fraud. It is critical to continually step back to evaluate the processes in place at your company. If you have further questions on how to deter and detect fraud, or if you have a case that needs to be investigated, ourForensic Accounting team is available to discuss any concerns or questions.