Signs of Employee fraud and how to ferret them out
Call it stealing, theft, embezzlement or larceny, occupational fraud occurs in all types of businesses around the globe. Taking post-it notes or K cups from the office on the sly may not have reached the level of larceny, but theft of cash or company funds, and the misuse of assets such as equipment, merchandise, and property can be truly damaging to your business.
Fraud...is when someone through a deliberate process misuses or misapplies the resources or assets of a business for their own personal benefit.
— Hubert Klein, CPA at EisnerAmper
Most fraud occurs in small companies and in small amounts, but as a business owner you know that every dollar counts and theft has direct implications on the bottom line. The Association of Certified Fraud Examiners (ACFE) says that each year companies lose 5% of revenues due to fraud, and in 2014 that number was estimated to be over $3 billion dollars.
Fraud hurts more than the bottom line. It can demoralize staff, bankrupt a firm, lead to increased audit costs, and/or ruin a company’s reputation, thereby leading to a loss of confidence and trust by both customers and the general public. Amazingly, according to Statisticbrain.com, “33% of all business bankruptcies were caused by employee theft!”
According to ACFE there are three main categories of occupational fraud:
Asset misappropriation - The theft of physical items for use or sale, check tampering, skimming or falsifying payments. Working on non-company business during office hours or providing to outsiders trade secrets, intangible or proprietary company information is also fraud.
Corruption - kickbacks, bid rigging, illegal gratuities, extortion, conflicts of interest, etc.
Financial statement fraud - Misleading or inaccurate financial information given to investors, shareholders and the public that include asset and revenue overstatements and understatements.
Often many incidences of fraud go undetected and are uncovered either by accident or as the result of a whistleblower yet there are discernible patterns of fraud as well as tell-tale signs that can alert business owners and managers to possible fraud. Here are several signs that employees may be stealing from you:
1. Different but consistent excuses for accounting mistakes.
2. Inconsistencies in their reporting and financial information.
3. Always eager to distribute mail first.
4. Works late or unusual hours when others aren't there.
5. Doesn't provide timely bank reconciliations or financial statements.
6. Provides excuses for inventory shortages and miscounts, and cash register or sales reports inconsistencies.
What can you do to thwart fraud that might be occurring under your radar? How can you protect your business? Have control systems in place such as:
• Require two signers for all checks when appropriate and reasonable
• Require monthly bank account reconciliations to be provided to you on a consistent basis – and review them
• Require proper recording, classification and reporting of all transactions
• Perform regular internal reviews and an external audit
• Use accounting software appropriate to your business
• Review documents and financial statements
• Perform background checks on all hires
• Utilize data monitoring tools that provide alerts when accounting rules are violated or preset limits are exceeded
Listen to employees who discover or think they know of fraud: According to the ACFE, “Tips are by far the most common way that occupational fraud schemes are detected.”
Tips are by far the most common way that occupational fraud schemes are detected.
— The ACFE
You may want to believe you have the most honest employees but the statistics show that you need to remain vigilant against fraud by creating preventive systems that will safeguard the reputation and financial security of your company.