Thursday, October 25, 2012

4 Tips for Preventing Employee Fraud

How protected is your company from employee theft?  Just the other day there was another story about how a Treasurer embezzled a half a million dollars and spent the money on a lavish lifestyle, travel and more.  It can happen to any size business and is often a trusted employee.  At a recent workshop, I learned a few tips from retired FBI Agent Jeff Lanza who is a nationally well-known speaker on Identify Theft and Fraud.

We learned more about fraud regarding checks and other theft, rather than strictly cash, so here are a few  important safeguards that business owners can put in place.

1.  Put Policies in Place.

Small businesses should have something like an employee or personnel manual, and other policies put into place such as Drug Free Workplace, Travel Policy, etc. to establish acceptable employee behavior when the employee is hired.  This seems like common sense, but just the other day I saw a discussion on how a company can 'stop' their employees from charging personal expenses on the company credit card.  This entire topic could be avoided by implementing a travel policy or having a section in the Personnel Manual.

If you do not have any policies established, there are numerous samples and templates available.  It is never too late to start!

2.  Establish Internal Controls.

Granting an employee too much control can lead to theft.  Setting up internal controls is a good way to protect against this.  For example, does someone review the payroll records?  Check vendor accounts?  Is your bookkeeper the only one with access to the bookkeeping system?

This can be a challenge for many small businesses with a few key employees, but is extremely important.  Even last week there was an article about how a bookkeeper had bilked a company out of thousands of dollars - their response was that they couldn't believe it...she was like family.

Keep an eye out for employees that:
1.  Are the only one who has access to account registers and bookkeeping.
2.  Won't let anyone get the mail.
3.  Never takes a day off.

I worked for one city that had an employee who stole from utility customers. She was ultimately fired and prosecuted.  The next receptionist we hired was unusually interested in how she went about it; sure enough, she tried it as well but luckily was caught thanks to new processes that were put in place following the first theft.

Things that can help:

  • Internal audits and surprise audits or reviews by an external firm.
  • Dual check signing requirements over a certain dollar amount.
  • Inventory Controls. 
  • Question vendor accounts - some payables clerks have set up bogus vendor accounts, submitted phony invoices and then paid that company.
  • Cross-training.
  • Setting up a tip hotline or a process for reporting theft.
As an owner, you put yourself and the business at risk if you do not have a good process in place for checking and reviewing revenues and expenses. 

3.  Review Check Images Online

This is easy enough to do now with online banking.  Check washing is commonly used in check fraud.  A person will take a handwritten check, 'wash' the ink off and make it out to themselves.  Lanza recommended using gel ink and purchasing safety-type business checks from a bank or other professional printer.

Another way for employees to misuse company checks would be if they were responsible for paying vendors directly.  A recent lumbermill employee stole over $500,000 from selling pallets to an unauthorized company. 

4. Verify References and Run Background Checks

If you are not currently checking references for potential hires, you should start.  Many people will tell you exactly what you want to hear in an interview and you are so excited to hire the person that this does not happen.  Some companies will require the prospective employee to run a credit check, others will do extensive background investigations.  

Employee theft and fraud can destroy a business - both financially and its reputation.  Above all, trust your instincts, yet don't be too trusting.  Taking some important steps to protect your business may not ever prevent theft but it can help catch it before it is too late.  Your Spokane SBDC Advisor can help if you are not sure where to get started.