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Employee Fraud: What You Can Do About It

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Employee Fraud: What You Can Do About It

By BarbaraWeltman, Guest Blogger
Published: July 17, 2014

Employees are one of your biggest assets, even though they don’t appear on your balance sheet. They help you operate your business and are the faces of your company brand. But employees can also be a big liability if they steal from you. What can you do to protect yourself?

Acknowledge the problem

*Recent statistics found that companies lose 5% of their revenues each year to employee fraud. Companies with fewer than 100 employees had 28% higher fraud losses than larger companies.

Fraud can take many forms, including outright theft of property (from paper clips to expensive inventory items), subtle theft by wasting time (focus on personal matters, sports events or other distractions), to embezzlement of company funds. Employees can be very creative in devising ways to steal from you, including creating bogus customers and invoices to siphon funds from the company.

Wise staffing practices

Having the best employees on your staff can go a long way in minimizing or avoiding fraud inside your company.

  • Do background checks before hiring anyone new. You can check public records to look for bankruptcies and criminal records without permission from the job applicant. If you want to do a credit check (there’s debate about whether a bad credit rating is any indication of potential employee fraud), you’ll need permission. Note: About a dozen states bar employers from doing credit checks of job applicants and employees and Congress is considering similar federal legislation (see S. 1837).
  • Get to know your staff so you can detect potentially bad situations. Those with financial difficulties, such as an employee experiencing a home foreclosure or one with a gambling problem, may feel impelled to steal. Those displaying unaccounted wealth, such as a Lamborghini suddenly being driven by an employee who was previously driving a Ford Focus, may raise suspicions.
  • Create the right company culture. Let employees know how seriously you view any theft.


Implement systems for protection

As with the three branches of the federal government, checks and balances can prevent an employee from manipulating financial data. The less opportunity that employees have to steal, the lower the incidence of such action will be.

Frequent inventories can monitor and detect any employee theft of company property. Bring your accountant in to review your inventory and other financial information.

Make it clear that employee theft will not be tolerated and that violators will be prosecuted to the fullest extent of the law. Unfortunately, some small business owners ignore illegal activity, which then breeds more of the same.

Be vigilant

As the business owner, it’s up to you to oversee what’s going on in your business. Look for clues that something nefarious may be going on, such as a bookkeeper who never takes a vacation or declines to delegate work. Limit review of the monthly bank statement to you and, perhaps, your accountant; don’t leave it to the bookkeeper to review the statement before you see it.

Create an anonymous reporting system for employees to tell you about suspected fraud without fear of retaliation. Tips are the *most common method of detection (), yet fewer than 20% of small companies have a system in place, compared with 70% of larger firms. If you want to implement a reporting system, it can be a web-based system or a special phone hotline for this purpose.

And keep your ears open to any talk from staff members about possible thefts that may be going on.


* Denotes non-government website


About the Author:

Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.


I agree, employees are indeed an important asset and is a vital component of every business firm. The performance of a firm depends on the quality of employees that are working in the firm.
I agree, employees are indeed an important asset and is a vital component of every business firm. The performance of a firm depends on the quality of employees that are working in the firm.
In my opinion, we should install the security camera in every corner
I think if each employee is made to believe that he too is one of the stakeholders of the company, the chances of fraud can be minimized.
I like the way you started "Employees are one of your biggest assets" it's really true. so nice
workers would be the largest asset for the corporation, but at the very same time there always looms risk of fraud at every single & every level. That is why it is important to be vigilant.
Great article! The ACFE’s Small Business Fraud Prevention Manual describes two key reasons small businesses have an increased risk of employee fraud, 1) a lack of basic accounting controls, and 2) a greater degree of misplaced trust. In a small business, it is typically the one-person accounting department who is found to be the thief. In other words, the person you least suspect is usually the one who commits the crime. Background checks and hiring practices themselves are not enough to protect your business from employee fraud. In fact, the vast majority of occupational fraudsters are first-time offenders with only 5 percent having been charged or convicted of a prior fraud-related offense. Outsourced Accounting firms like Signature Analytics (www.signatureanalytics.com) provides small and mid-sized businesses with the resources of a full accounting team on an outsourced basis,so clients achieve an effective segregation of accounting duties without having to hire additional full-time accounting staff.
In my opinion, we should install the security camera in every corner
I totally agree with you that employees are one of the biggest assets of the company but its very important to point out the mistakes done by anybody at right time for smooth functioning of the firm
I agree to the fact that employees is the biggest asset for the company, but at the same time there always looms risk of fraud at each & every level. That is why it is important to be vigilant, while implementing latest systems or technology, which can definitely help in averting fraudulent at every level.


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