Protecting Small Businesses Against Employee Fraud

Employee fraud can affect organizations of any size, but small businesses may be especially vulnerable because they often have fewer employees available to separate financial responsibilities and maintain formal antifraud controls.

Employee theft can have devastating financial consequences and even put a company out of business. Luckily, if employers are diligent in recognizing the signs and taking precautionary measures, they can often prevent fraud or catch an employee in the act.

What Is Employee Fraud?

Employee fraud takes many forms, such as:

• Asset misappropriation
• Embezzlement of money
• Bribery and corruption
• Product theft
• Time theft
• Unauthorized discounts on products
• Financial statement fraud

Identifying Employee Fraud

Behavioral and workplace warning signs can help organizations identify situations that warrant closer review, but no single sign proves that fraud has occurred. Employers should focus on objective financial irregularities, control failures and documented conduct rather than assumptions about an employee’s personal circumstances. Consider the following, for example:

• Employees unwilling to share duties
• Employees resistant to oversight
• Employees with unusual control over processes
• Employees who refuse to take time off
• Employees with unusually close relationships with vendors or suppliers

Employers should avoid engaging in discriminatory practices when identifying potential fraud.

Strategies to Prevent Employee Fraud

Strategies small businesses can implement to prevent employee fraud include the following:

• Reviewing financial statements regularly and reconciling bank, payroll and vendor records promptly
• Depositing cash and checks daily
• Separating financial responsibilities and requiring appropriate approval for payments and changes to vendor banking information
• Monitoring for unusual transactions, duplicate payments and newly created vendors
• Independently verifying payment or account-change requests using known contact information
• Restricting access to accounting and financial systems based on employees’ job responsibilities and reviewing access when roles change or employees leave
• Scheduling random audits and periodically engaging an outside accountant to review the organization’s finances
• Conducting job-related background checks when appropriate and permitted by law
• Establishing clear policies against fraud and theft
• Reviewing commercial crime insurance options, including employee-theft coverage, with an insurance advisor
• Providing a confidential way for employees to report suspected fraud and protecting employees from retaliation
• Training managers and supervisors to recognize and report potential fraud
• Establishing a process for responding to and investigating suspected fraud
• Creating a culture of integrity
• Ensuring employees take time off periodically

Employer Takeaways

By taking precautions and implementing internal controls, small businesses can effectively limit their risk of employee fraud.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.