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CPA Insights: 7 Steps For Preventing Employee Theft

(posted: February 12th, 2015)

Theft, fraud, embezzlement...However you label it, it's a major issue for businesses of all sizes in all industries.

According to the Association of Certified Fraud Examiners' (ACFE) 2014 Global Fraud Study, organizations lose an estimated 5% of revenues each year to fraud. This equates to global losses totaling more than $3.5 trillion.

There are also less tangible costs to employee and employer fraud, such as low employee morale, decreased engagement & productivity, ruined reputations and tarnished brand perception.

Some additional facts from the study:

  • The median loss to a business was $145,000.
  • 60% of employees will steal if given the opportunity and a compelling motive
  • Businesses with fewer than 1,000 employees account for more than 52% of the total number of reported cases.
  • About a third of business failures are related to employee theft and other employee crimes.
  • The smallest organizations tend to suffer disproportionately large losses.

What Can You Do?

From the ACFE Study, "Proactive detection measures — such as hotlines, management review procedures, internal audits and employee monitoring mechanisms — are vital in catching frauds early and limiting their losses." However, for small businesses the expense for bigger, more sophisticated options can be out of reach. That doesn't mean you should give up.

7 Steps To Reduce Employee Theft

Hire Carefully. Interview for character as well as for skills, check references and do background checks.

Educate & Train For Fraud Prevention. Have a written any-fraud policy explicitly stating the company's zero tolerance for employee theft, and talk about it. Discuss with employees the effect fraud has on the business, and how it affects them. Also ensure that employees are aware that audits happen regularly and spontaneously. Openly addressing employee theft can be a very effective deterrent.

Create a Culture of Fraud Prevention. In addition to your anti-fraud policy and education, create a culture of trust, loyalty and openness. You are much more likely to hear about fraudulent behavior when your employees feel like they matter and that you appreciate their contribution to the business.

Formalize Internal Controls & Review Procedures. For example, divide duties among several people so that no one person is responsible for an entire chain of cash control. Institute documentation policies, as well.

Automate or Outsource Accounting. Choose an accounting software system that allows you to set access levels and track the employees that have that access. This will allow you to monitor your finances for unusual activity. Using a third party bookkeeping service goes a step further, removing the process from your business entirely, and also providing a regular audit process.

Take the Pulse of Your Business. Even with trustworthy employees on staff, it's never wise to remove yourself completely from reviewing your company's financial statements and account activity. Taking a little time each month to look at the flow of transactions through your accounts will ensure that you can identify any unusual activities right away. The time you spend ensuring the integrity of your company's financial flow will pay off in terms of loss prevention.

Look For Employee Red Flags. Fraudsters often exhibit behavioral traits that can be warning signs of their crimes, such as living beyond their means or having unusually close associations with vendors or customers. Managers, employees, auditors and others should be trained to recognize these warning signs that, when combined with other factors, might indicate fraud.

Preventing and combating internal fraud, or employee theft, can be difficult and confusing, especially for smaller businesses with limited time and resources. Start with some of the simpler steps, like formalizing your anti-fraud/anti-theft policy. If you’re still unsure about which anti-fraud measures to enact in your company, consult a fraud examiner, anti-fraud consultant or auditor for guidance.

We are here to guide and advise you. Please contact us with questions, or visit our Risk Management page.

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