Preventing Employee Fraud: Top Ten Tips

Research shows that small businesses are often more vulnerable to fraud than their larger counterparts because they have fewer employees. Companies with fewer employees tend to have less segregation of duties and fewer internal accounting and auditing controls. Closer relationships and trust occur between small business owners and their employees which reduces suspicion and makes the business more susceptible to employee fraud.

Small businesses can protect themselves by making employee fraud prevention a priority. The following guidelines are essential for developing a fraud prevention program for your small business:

1. Understand your company's specific fraud risks. Conduct a thorough audit of your company's specific vulnerabilities in order to design and implement internal controls and fraud prevention programs.
2. Conduct employee background checks. Verify educational and employment history, as well as references, to ensure no previous history of fraud or other illegal activity exists. For employees that will manage company assets, it is especially important to conduct credit checks (if authorized by the candidate).
3. Implement an accounting solution to aid with fraud prevention. By deploying accounting software, like Sage 50 Accounting, small businesses can mitigate fraud risk through audit trails which identify common transaction mistakes, departures from GAAP (Generally Accepted Accounting Principles) and red flag transactions. Role-based security within such software is useful in ensuring that employees only have access to the areas of the business within their specified responsibility and are unable to cover up fraud schemes.
4. Control the bank statements. As a small business owner, be sure to open the bank statements yourself to help fight cheque tampering. Look out for missing cheques, cheques issued out of sequence, unknown payees, cheques that appear to have been altered, cheques not signed by authorized signatories, or any other unusual items. You should conduct bank reconciliations at least once a month. Consider using online banking options to streamline the process if your company regularly has large numbers of transactions and/or large dollar volumes.
5. Use only approved vendor listings. This can help with fighting billing schemes and dealing with phony invoices. Management should routinely check the list of approved vendors and look out for unknown vendors, vendor names that are similar to other known vendors, vendors with no physical address or phone number or vendors that match an employeeís address.
6. Centralize payroll cheque distribution. By centralizing payroll, management can help eliminate "ghost" employees; which include fictitious persons on the payroll, employees retained on the payroll that no longer work for the company, or friends or relatives of an employee.
7. Create a fraud policy. Design, publish and implement a fraud policy that establishes expected employee conduct, prohibited actions, how fraud can be reported and the punishment for noncompliance.
8. Train your employees in fraud prevention. Employees serve as the eyes and ears of a company and by ensuring that your staff is knowledgeable about basic fraud prevention techniques, you'll establish a first line of anti-fraud defence.
9. Conduct routine and unannounced checks on high risk areas of your business, including the financial and inventory departments for vulnerabilities and possible fraudulent activities.
10. Make employees go on vacations. Employees undertaking fraudulent activity may not take time off because they are fearful of someone catching on to their indiscretions. Ensure all employees take vacations so no one in the organization has physical in-person control over their area of responsibility each and every day of the year.

Remember, by nature, fraud is hidden. There is no 100% guarantee to avoid fraud. Research has shown one of the most important deterrents to fraud is 'tone at the top.' Management stance on ethics has a direct effect on employee behaviour. The first goal is to prevent fraud and the second is to catch it as quickly as possible.

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