During poor economic times, many businesses see an increase in fraud. Businesses tend to see a rise in employee fraud, also known as embezzlement, in particular as employees struggle with personal finances.
Small companies are especially vulnerable to employee fraud due to the fact that they tend to have fewer formal financial controls in place to prevent it. A 2010 survey by the Association of Certified Fraud Examiners found that 31 percent of employee fraud occurs in companies with less than 100 employees, compared to 21 percent in companies with more than 10,000 employees. The losses due to employee fraud were also greater in smaller companies, reporting losses of nearly $150,000 versus losses of about $84,000 in larger companies.
There are five common types of employee fraud:
• Billing fraud
• Corruption (bribery, illegal gratuities, and kickbacks)
• Check tampering
• Expense reimbursement fraud
If you own or manage a small business, there are steps you can take to help reduce the risk of employee fraud:
• Have two different employees handle accounts receivable and company disbursements. Having a single employee responsible for all of the finances creates a significant risk for fraud. If financial responsibilities are divided, employees can check each other and catch discrepancies.
• Bring in an outside accountant annually to conduct a financial review.
• Personally review all bank statements monthly and be the first person to do so. And be sure to look at the actual cancelled checks, not just the numbers. Making the effort to check the statements sends a message to your employees that you are involved in the company finances and creates a deterrent.
• Examine receipts for deposits of both federal and state taxes and be sure to do so promptly after paying them.
• Watch for inventory shortages or lower-than-expected cash flow that may signal skimming.
• Watch for unusually close relationships between employees with financial responsibilities and vendors that could indicate kickbacks or other types of corruption.
Identifying employee fraud can be difficult. Many times the perpetrator is a trusted employee who employers wouldn’t suspect of stealing from them. About 90 percent of employee fraud perpetrators are first time offenders and 42 percent have been with the company for between one and five years. Many embezzlers start out with the intention of paying the money back before anyone notices. There are some potential signs that could indicate an employee is embezzling. Embezzlers never take vacations or days off because it would give other employees an opportunity to find evidence of the fraud. A sudden change in lifestyle and extravagant spending could also indicate an employee who may be committing fraud.