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Protect Against Employee Fraud in Your Small Business

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Fortune 500 companies with millions or billions in profits may seem like prime targets for fraudulent scams. But small companies actually have a higher fraud rate than bigger organizations, partly because fewer safeguards protect these businesses, according to the Association of Certified Fraud Examiners (ACFE).[i]

When an inside job hits a company with fewer than 100 employees, the median loss is $147,000, according to the ACFE. That large of an impact can cripple a small business that doesn’t have the ability to recover as quickly as larger companies.

“We typically deal with organizations that are growing fast and furious,” says Dan Andrea, a partner who oversees forensic-accounting investigations at Feeley & Driscoll P.C., a Boston accounting and consulting firm. “If they start going lax on the controls, it’s a recipe for disaster.”

Here are some common employee-fraud scenarios, along with ways that may help you detect and protect against them:

1. When an employee is the culprit

One of the most frequent types of internal fraud occurs when an employee sets up a fake vendor and submits invoices to the company for payments that actually go to the employee, says Allan Bachman, CFE, education manager at ACFE in Austin, Texas. For example, someone might pretend to hire a carpet cleaner and then keep the money intended to pay for the service.

Another scheme involves simply stealing funds and altering the records to make it look like nothing is missing, Bachman says. Or, an employee might overpay a vendor—cutting a check for $2,000 instead of $1,000—and, when the extra money is refunded, pocket the difference.

“I’ve also seen situations where a person working in the payroll department created a fictitious employee who was ‘paid’ on a regular basis,” Bachman says. Though employees sometimes steal merchandise or other tangible goods, he adds, it’s far more common for them to take money.

2. Detect employee fraud quickly

Small business owners should have company bank statements mailed directly to their homes so no one has the opportunity to alter them, Andrea says. Reviewing financial statements each month and vendor lists every quarter can help you uncover suspicious transactions or fictitious accounts for unfamiliar vendors.

The most proactive way to target internal fraud is to focus on the employees themselves. As part of the hiring process, it’s a good idea to conduct background checks, but Andrea also suggests running employee background and credit checks on an ongoing basis. Look for warning signs, such as lavish spending, behavior and lifestyle changes.

3. Protect against employee theft

Deterring employee fraud begins during the hiring process and employee training when you make it clear that thieves will be fired, prosecuted and sued to recover assets, Bachman says. You can include this language in your employee manual and require employees to acknowledge that they understand your policies in writing when they are hired, and on an ongoing basis each year.

Other loss protection procedures that can discourage fraud include installing an audit log that allows owners to review all financial transactions. Andrea also suggests rotating passwords frequently and requiring that backup tapes containing company data be encrypted.

Overall, being alert and involved in the financial details of your business will go a long way toward protecting against employee fraud. Bachman likes to tell the story of a serial scammer who defrauded a number of companies for which he worked. According to Bachman, after being caught, the person said, “If the owner had done something as simple as opening the bank statements when they came to the office, I never would have thought about stealing from the company.”


1. "Report to the Nations on Occupational Fraud and Abuse," 2012 Global Fraud Study, Association of Certified Fraud Examiners

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