Employee fraud – avoiding the pitfalls

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A business needs employees. It relies on employees. It thrives when employees are engaged and loyal. So how can a business maintain this thriving environment and avoid the pitfalls of employee fraud?

Choose employees wisely. This might seem like common sense, but most employees who steal, have stolen before. Be thorough in hiring procedures. Check references. Take interviewing seriously at all levels of the business.

Compensate employees fairly. Of course monetary compensation is a factor here. But compensation can also come in the form of constructive feedback, respect, appreciation, and flexibility. Employees who feel that they are fairly compensated and valued by the business, are less likely to commit employee fraud.

Encourage vacation time. Most employee fraud schemes are difficult to manage remotely. Employees involved in fraud tend not to use vacation time for fear of the fraud being discovered while they are away.

Separate key responsibilities. Avoid giving any one employee autonomous control over either cash receipts or bill paying.

For instance, a business needs to pay a vendor and a single employee has the following responsibilities: (1) generate the check, (2) sign the check, and (3) record the corresponding expense in the accounting system (i.e. QuickBooks, Peachtree, etc.)

Under this scenario, the employee has every opportunity to commit employee fraud and embezzle funds out of the business.

Separating key responsibilities limits opportunities for dishonesty, while fostering a team environment of checks and balances.

For small businesses, “separation of duties” is difficult to achieve. In the case of very small businesses, the best option is strong and consistent owner involvement until the business is large enough to establish a separation of duties policy.

Safeguard assets. Where possible, implement safes, locks, and passwords to protect assets. Assets include cash on hand, checking account access, inventory, equipment, etc. Only employees that need access should have access to any given asset group.

Monitor problem areas. Identify areas where the business is most susceptible to employee fraud. Once these areas are identified, determine how they can be appropriately monitored. Monitoring can take on many forms. In a small business, monitoring could be as simple as the business owner periodically performing the monthly bank reconciliation him or herself.