3 proven strategies to prevent internal fraud and embezzlement
“Good one!” I thought, as a colleague of mine in the payroll industry was describing how one of her client’s employees creatively embezzled hundreds of thousands of dollars from the company. The scheme was so ingenious, I added it to our internal “watch list” for future reference.
The worst part about this employee’s actions was that they not only bankrupted the company but put the owners into personal financial ruin. Unfortunately, this is an all-too-common occurrence. Employees often have their hands in a business’s cookie jar.
Despite the surprisingly common risks of fraud, there are smart steps you can take to stop it in its tracks. A 2016 survey by accounting giant KPMG surveyed 750 fraudsters, discovering that 60% or more of the perpetrators were allowed to continue their fraud due to weak internal controls – a significant jump compared to previous years.
Plus, it’s important to realize that the people most likely to commit fraud are actually senior employees. According to the same survey, 38% of fraudsters have worked at a company more than 6 years, compared to 14% who worked there between 4-6 years, and 21% who worked there for 4 years or less.
Instituting checks and balances over financial transactions ensures that no one employee can easily commit fraud
Checks and balances are the primary methods of limiting fraud, and they can take many forms. One tactic is to segment your financial transactions so that different employees have control over different parts of the process. For example, you might authorize different employees to handle purchases, payroll, and disbursements. It may also be a smart move to separate “handling (receipt and deposit) functions from record keeping functions (recording transactions and reconciling accounts).”
Plus, you may want to make sure that no one person is authorized to both write and sign checks, as this is an easy invitation to fraud, embezzlement, and other kinds of financial abuse. It can also be a good idea to ban employees from making checks payable to cash and to closely protect any blank checks – treating them as securely as you would company cash.
Create strict policies for company credit card use and keep a close watch on all charges
While it’s often necessary to give your employees access to credit cards to make important purchases, it can create a real temptation to commit fraud. That’s why it’s essential that you make sure workers know your rules about company cards. In most cases, you (as the business owner) should be the only one who can order/issue a new company card – and you should be the only one who decides who, when, and how those cards can be used.
Plus, it’s smart to prohibit using cards for any kind of personal expense, even with subsequent reimbursement. All it takes is a few employees ‘forgetting’ to reimburse you, and you could be out a serious amount of cash.
While it might sound obvious, you should regularly check credit card statements and receipts to make sure your rules are being followed. If your people know statements aren’t being checked, it makes it all the easier for them to decide to skirt the rules. The same concept goes for petty cash, debit cards, or any other ways employees are allowed to spend your company’s money for business expenses; establish strict rules, limit the number of users, and track everything.
Keep a close watch for fake vendors, overpayments, and other suspicious activities
When it comes to keeping your finances safe from employee fraud, it pays to understand some of the strategies individuals might use to deceive you. Unfortunately, one of the most common methods is the creation of fake vendors. In some cases, employees have gone as far as to create their own corporation or LLC in order to bill their employer for some supposed service. Sometimes, the vendor’s name will be nearly indistinguishable from a real vendor that your company uses, making it even easier to overlook.
In yet other cases, the fraud could be a partnership between your employee and an employee working at your vendor – which is why it’s also important to look out for overpayments to vendors.
Surprise audits, mandatory vacations, and third-party hotlines can also prevent employee fraud
One way to keep your employees honest is to institute a surprise audit. Unlike a pre-planned audit, which could give a dishonest worker time to ‘cook the books,’ a surprise audit can often expose even the smartest of fraudsters.
Another way to thwart fraud is to institute a policy of mandatory vacations. It’s well known that employees committing long-term fraud often refuse to take a vacation. From the outside, this could look like a result of their commitment to the company, but in reality, they’re afraid that if they leave their desk for too long, someone might be able to detect irregularities in their work.
According to the same KPMG survey mentioned earlier, 44 percent of fraudsters “were detected as a result of a tip, complaint, or formal whistleblowing hotline.” So, even if you’re running a relatively small business, it could seriously benefit you to have some sort of mechanism that allows your employees to report potential fraud.
When it comes to employee fraud, ‘an ounce of prevention is worth a pound of cure’
Keeping your business’s finances safe can sometimes feel like a full-time job – but it doesn’t have to be. Set the right policies and procedures, and you can rest assured that you’re doing what you need to do to prevent fraud before it happens.
And, if it does occur, the right strategy can detect it before it becomes a serious financial problem. The faster you plug those holes, the less damage they will do.
Profit Point Consulting’s mission is to accelerate the growth of small and medium-sized companies through sound, strategic advice, and proactive financial management. If you need a trusted advisor to help develop and execute your vision, call us at (973) 659-1430 or fill out our contact form.