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Small Business

Protecting Small Businesses Against Employee Fraud

U.S. small businesses are at increased risk of employee fraud. With the right controls, much of it can be prevented.

July 31, 2023

Employee fraud, which involves deliberate dishonesty, theft or deception by an employee for personal gain, is prevalent in nearly two-thirds of U.S. small businesses, according to the National Federation of Independent Business. Compared to larger organizations, small businesses typically encounter an increased risk of employee fraud due to a lack of basic controls and a higher degree of misplaced or assumed trust.

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

Identifying employee fraud can be difficult. However, many employees who steal from their employers have experienced prior HR red flags. Employers should look out for the following:

  • Employees living beyond their financial means
  • Employees experiencing financial difficulties or family issues
  • Employees working in positions to commit fraud
  • Employees who frequently work late or longer hours than usual
  • Employees with an unusually close relationship with a vendor or supplier

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
  • Depositing cash and checks daily
  • Distributing financial responsibilities among employees so one person doesn’t have too much control over the organization’s finances
  • Scheduling random audits and periodically hiring an outside accountant to review the organization’s finances
  • Performing background checks
  • Establishing policies against fraud and theft
  • Obtaining an insurance policy that covers employee theft and fraud
  • Establishing a way for employees to report workplace fraud anonymously
  • Training managers and supervisors to recognize and report potential 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.

Related Reading: Cybersecurity Tips for Small Businesses

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