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Are Your Employees Committing Fraud? What to Watch For and How to Stop It

Are Your Employees Committing Fraud? What to Watch For and How to Stop It

No business is immune to employee fraud. Organizations, on average, lose 5 percent of revenue each year to occupational fraud, and 58 percent of affected organizations do not recover any of their losses.1

The good news is that a fraud prevention strategy based on simple monitoring can help build a culture of accountability that makes double-dealing less common and less costly. Here are six steps you can take right away to reduce the risk of employee fraud at your company:

1. Do a self-examination

Employee fraud can occur when the company leadership inconsistently enforces standards—or worse, doesn’t enforce them at all. Have a single set of fair and clear rules around
travel, credit card and other spending policies, and don’t allow employees to cut corners for the sake of convenience. Overlooking consistent sloppiness could eventually encourage others in the company to steal. Be confident that your managers are complying and that they’re consistent in applying rules, as well.

2. Don’t be shy

It’s human to want to avoid confrontation, but asking about something that doesn’t make sense isn’t making an accusation. It’s asking for information. Take note if someone is having emotional disputes with auditors (or those who have that function in smaller firms). In fact, listen to auditors who tell you a manager is reluctant to answer routine questions or repeatedly gives vague responses. Fraud harms the business, and thus everyone’s paycheck, and your persistent and vocal focus will indicate to everyone that instances of fraud are likely to be discovered.

3. Follow the money

Watching expense reports is important, but it’s just the beginning. Extravagant employee compensation programs could be hiding misappropriated funds. A lot of transactions naturally crown in the last quarter, but look for unusual numbers and amounts that would stand out in slower periods. It also pays to monitor purchasing inventory. If it’s rising with no commensurate increase in sales, there might be a problem.

4. Raise accounting’s profile

No department should be led by inexperienced managers or staffed with mostly green employees, but this is particularly true for accounting. The accounting department must set the tone for your company when it comes to the use of funds. Part of the department’s bona fides must be the ability to fairly and rigorously manage the daily flow of information and money. If appropriate questions aren’t asked by your accounting staff, they probably won’t be asked at all.

5. Check your structure

Beware of an org chart that results in unit-level decisions that are dominated by one manager or a small group of managers. If that can’t be avoided, make sure you pay attention to the preceding checklist items in regards to this unit. Generally, the larger and more collaborative your set of decision-makers is, the less likely any one of them will commit fraud. Don’t forget that your vendors are part of your business structure and that they can also help you identify fraud.

6. Block off the opportunities

Create—and maintain—defined duties for every last
person. It promotes accountability and makes tracking discrepancies easier. Build system controls that appropriately balance efficiency with fraud prevention. Write and enforce management-approval policies. This bolsters accountability while also spreading a culture of honesty and fairness.

Ready to take action?

Talk to your banker about fraud protection tools that can help you automatically flag unauthorized activity and prevent losses before they occur.

1 “Summary of Findings,” 2014, Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study 

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