10 Ways to Protect Your Organization from Employee Fraud

Employee fraud costs businesses billions of dollars every year.

According to a 2008 report by the Association of Certified Fraud Examiners (ACFE), 994 billion dollars is lost every year to employee fraud.

This equates to businesses losing a staggering 2.7 billion dollars every day!

ACFE defines occupational fraud as:  “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.”

“Fraud is now so common that its occurrence is no longer remarkable, only its scale. Any organization that fails to protect itself appropriately faces increased vulnerability to fraud.”

Fraud is typically triggered by what is called the fraud triangle. The fraud triangle is financial pressure, a rationalization for the act and the opportunity to commit fraud.

The current economic environment creates desperate situations for people and it is the organization’s responsibility to have systems in place to protect both the organization – as well as the employee. A good employee put in an uncontrolled environment might do things they would not ordinarily do because of external pressures.

ACFE founder and Chairman Dr. Joseph T. Wells, CFE, CPA, writes in “Small Business, Big Losses”  that “small businesses remain the most vulnerable to occupational fraud because of three factors: They are the least likely to have an audit, a hotline or adequate internal controls.”

Did You Know:

• Most fraud cases are in manufacturing, banking and insurance;
• The median loss is $175,000;
• A large number of fraud cases are never reported;
• It is the first offense for most offenders;
• Fraud is most often committed by upper management and accounting employees;
• Only 7% of those caught have a history of theft;
• Most fraud starts small, develops and grows over time;
• Since most are first time offenders, background checks don’t reveal them;
• Almost half of incidents involve more than one person;
• Fraud is most common in organizations with less than 100 employees;
• It usually takes about 18 months to catch someone stealing;

What You Should Watch For:

• Behavioral changes;
• Obvious use of drugs or alcohol;
• Someone living beyond their financial means;
• An employee who doesn’t take time off;
• Financial pressures at home;

10 Ways to Protect Your Organization from Employee Fraud

1. Create a Written Fraud Policy

Create a written fraud policy and include things like:

• Definition of what fraud is – you may be surprised that many employees don’t understand the term.
• Zero tolerance for fraudulent behavior – emphasize that one time and you are out.
• How an investigation would be done –  describe in detail what the process would like and how it would impact an employee’s privacy, reputation and employment.
• Consequences – immediate termination – employees need to understand that there is no begging for forgiveness.
• Outcome  of fraud – prosecution – help employees understand the sober impact of their behaviors.

2. Policy Training

The best way to help employees and managers understand a fraud policy is to do a formal training on the policy.  The policy should be updated annually and incorporated into the new employee orientation process.  Helping employees understand the organization’s commitment to protecting its assets is a great deterrent of possible fraudulent behavior.

3. Good Internal Controls

Good internal controls:

• Help keep the organization accountable for accurate financial information by protecting assets;
• Allow for accurate information to plan and monitor business operations;
• Maintain compliance with federal, state and local laws;
• Provide a mechanism to monitor organizational goals.

 4. Have Investigation Procedures

There should be a clearly defined process to investigate questionable behaviors and/or financial information.  Defining the process ahead of time allows for a more timely and efficient investigation.

5. Two Person Rule

It is never good practice to designate a single person to pay bills and monitor bank statements. Assign at least two people responsibility for paying bills and looking at bank statements.  Require monthly reporting, and read the reports!

6. Have a Confidential Tip Hotline

Make it easy for employees to report something that is questionable.  The more simple (and confidential) the process, the more likely it will be for employees to make the organization aware of suspect fraudulent activities.

7. Enforce Mandatory Vacations

Taking time away from the office is not only good for employee morale but it is also good for the organization.  Make sure that every position, with even a remote access to cash or assets, has a trained back up.

Add to your employee policies a requirement to take the minimal allowed PTO time away from work.  Pay attention if someone is resisting this request or hesitates from training a back up for their job.

8. Use a Safe for Cash

Incorporate the use of a safe for all cash as part of your internal controls.  Require those who handle cash to use the two person rule for handling cash transactions and have a safe with a drop box to allow for a limited number of people to have access to the safe combination.

9. Review Internal Control Processes

Once an internal control process is created, make sure you review and audit it at least annually. Talk to employees who use it and spend some time to refine and improve the process for the organization.

10. Conduct an Internal Audit

Conduct an internal audit and ask the following questions:

• Who has access to accounting system?
• How are they supervised?
• Is there more than one person involved in all accounting processes?
• Are all supplies accounted for?
• Is there a process to recognize supply shrinkage?
• Does the company owner review monthly bank statements?

Finally, it is the responsibility of the board and senior management to ensure the organization is protected against fraud.  Having good internal controls and consistent auditing processes can help to eliminate the opportunity of fraud within your organization.

What do you do to protect your organization against fraud?

Check out The Corporate Fraud Handbook to help with next steps!