Employee fraud can be a big problem for small business owners. Every year, organizations lose around 5% of their income to employee fraud and maltreatment. Companies lose $50 billion each year as a result of employee thievery. Employee theft is on the rise at a rate of 15% each year. Employee theft targets cash, property, or merchandise.
Many employees in small businesses have access to their company’s financial information, and the employee gets away with thousands of dollars before being caught.
Employee theft may occur in a variety of ways, including the theft of cash. This might include stealing office equipment, food and restaurant supplies, payroll fraud, and retail store goods.
Here are some tips on how to prevent employee fraud in your business and protect business assets.
What a Company Owner Can Do to Prevent Employee Theft
There are several things a small business owner may do to keep an eye on their workers and company activity in order to discover or prevent employee fraud.
Know Your Employees
Start with background checks to research the people working for you. Background checks are not just limited to previous employment history, but also include credit history, court records, family and personal connections. This way, you can verify small details like their educational credentials before hiring them.
Also, be alert to key indicators of potential employee theft, such as employee excuses, employee inconsistencies in work habits and employee associations with other employees. If you notice suspicious behavior, think back to unverified employee complaints or violations of company policy that may have seemed innocent at the time. These are all red flags that employee theft may be in your organization.
Monitor Your Cash Registers Closely
If you are a small business owner who carries any amount of cash on hand, it is crucial that you carefully monitor cash registers to ensure that everything adds up correctly. You may even want to consider cash counting machines that can add up your cash and check for counterfeit bills.
If you only deal with cash, it is recommended that you bring in a cash-counting machine at least once a week to count your cash and validate the amount against your cash registers. You can usually rent cash-counting machines at the same place you would buy them if cash counting isn’t something you do regularly.
If someone is stealing cash from your cash registers, it’s likely they are also stealing cash deposits for themselves as well.
Supervise Employees Closely
Supervising employees closely will not only monitor their activities and behaviors, but it can help prevent employee theft and fraud. Employees may feel uncomfortable with the supervision at first, but as they become aware that you monitor them closely for legitimate reasons, they will eventually come to see your supervising as a positive aspect of working for you.
Use Purchase Orders
It’s common practice for companies to give employees the authority to purchase items on behalf of the company. But if you don’t keep a written record of these transactions, your business could be at risk for fraud and theft.
When you use purchase orders, every item that is paid for by your business has a paper trail that follows it from its location throughout the entire transaction process. This includes when it’s ordered, received, paid for (with an invoice) and used.
If you use purchase orders regularly, your business is less likely to suffer from employee theft or fraud because there are many records of every purchase that can be reviewed at any time by anyone in your company.
Control Cash Receipts
Even though it seems like a good idea to just let employees use the cash register and count out their own money, this can result in loss and crime.
There are many ways that you can control receipts to prevent employee theft. Some of the simplest, but most effective ways to do this is by keeping a log that shows exactly who has done what with the cash register at the end of every day. This can be as simple as writing down which employee was working when something happened.
You may also want to set up security cameras, especially if you have multiple people using one register or accessing one safe.
If you want to be overly thorough, you could also use an accounting software package like QuickBooks to monitor what each employee is spending their money on, and what they are giving back for change. This will help ensure that your employees are not misusing their position or stealing from you through sloppy bookkeeping practices. You can then run reports that show exactly when an employee is breaking the rules.
You should also make employees sign in and out when logging money in or out, but be cautious about having everyone write their name on the register tape every time they swipe their card at a transaction. You can do this digitally with a merchant services Point of Sale (POS) software, and it requires no manpower.
Use Informal Audits
Fraud can be prevented at a business by conducting informal audits. Conducting a formal audit every year would cost too much money for the business, but there are easier and faster ways of preventing fraud, such as performing informal audits.
Informal audits are a quick and simple process that does not require a lot of time or money. Informal audits can include checking the accuracy of recorded information, just as formal audits do. However, informal audits can also check for more things than formal ones do. For example, an informal audit may check to see if employees are following the organization’s ethical standards. An informal audit might also check to make sure that all of an employee’s behaviors are consistent with organizational expectations.
A business can conduct an informal audit by checking for inaccurate information in financial reports, ensuring that transactions are recorded correctly, and checking for any evidence of favoritism or other policy violations.
Implement Financial Controls and Procedures
Financial controls and procedures are a company’s first line of defense against any type of financial mismanagement, including embezzlement by employees.
Policies regarding purchasing, receiving gifts from vendors, and expenses must be established up front with the entire staff to prevent cases of employee fraud. Any theft of assets, including cash and inventory, should be investigated thoroughly. The procedures for investigating financial matters vary from company to company, depending on the size and needs of the business. Financial controls and procedures should include:
- A strong internal control system
- Separation of duties
- Physical security measures such as locks and access cards
- Record keeping policies that include date, time and detail
- Adequately trained employees
Install Computer Security Measures
Computer security measures are the simplest way to detect and prevent employee theft against a company. Employees can install these measures both in local computers themselves, but also remotely on servers by IT personnel.
Anti-Virus Software
First off, it is recommended that all computers have anti-virus software installed. This will help protect against viruses, malware, and other malicious files. Malicious software is often used to capture keystrokes or take screenshots of an employee’s computer. This allows the company’s trade secrets to be stolen, customer information to be compromised, and money laundering schemes to take place.
Password Protection
Similar to protecting against viruses, employees should also use strong passwords that are difficult to guess. The more complex the password, the harder it will be for malicious files and software to infiltrate a company’s system.
Data Destruction Software
In addition to anti-virus and password protection, companies should also invest in data destruction software. Data destruction software ensures that employees cannot take any company information with them when they leave the company. Therefore, if an employee gets terminated or leaves on bad terms, there is no longer any risk that he or she will be able to bring company secrets with them.
Track your business checks.
Employee theft may be prevented by keeping track of all company checks. You can do this through a check-tracking program or a bank service like Positive Pay that tracks all transactions for you. All work-related checks should be recorded so if an incident occurs, you have the evidence of the crime for your records and possible further action.
Manage Inventory and Use Security Systems
When businesses are looking for how to detect employee theft, the first place many turn is their own inventory management system. The inventory tracking software should be user-friendly and have the following features that allow you to monitor who performs which actions in relation to your products, when these changes are made, and any additional notes about activities associated with the products.
If you are using physical security systems, then it is important to consider that the best practice is to have them be automated, rather than manually activated. Automation allows for less manpower to monitor security cameras and means that the proper employees will come when called by an alarm system.
A few more ways to help detect employee theft are to include security cameras in your business, or if you use manual systems to manage inventory, have all employees sign off on the products they handle rather than marking them as sold.
How Your Employees Help You Prevent Business Fraud
Employees may also assist you in keeping track of and preventing employee fraud at your business.
Educate Your Employees on the Warning Signs of Fraud
Employee fraud can cost a company thousands or more in time, money, and lost productivity. To combat this type of crime, it is important to educate your employees on the warning signs of fraud.
Employees who are aware of the red flags associated with fraudulent activities may be able to intervene before a crime takes place. A proactive approach encourages employees to report suspicious activity, which can help prevent a crime from occurring or escalating.
Employees should also understand their roles and responsibilities when it comes to preventing fraud.
Providing employees with the knowledge, skills, and abilities required in order to minimize risk of employee fraud will allow them to stay vigilant for suspicious behavior among their co-workers.
Encourage Employees to Report Any Suspicious Behavior
Prompt internal reporting of any discrepancy or outside sign of fraudulent activity. Employees should be allowed to question their supervisors or managers regarding policy without fear of repercussion. If an employee feels his boss is engaging in fraudulent behavior, he should feel secure in bringing this concern forward. Any retaliation against the reporting party will only work to hamper efforts to discover fraudulent activity by other parties.
Train Your Staff in Basic Accounting Principles
Preventing employee theft begins with training your staff in basic accounting principles. Employees who know the basics of accounting – such as how to write a journal entry, read and understand balance sheets, and test for suspicious activities on the books – are less likely to commit fraudulent acts.
Teach employees about the proper handling of company money. Provide clear policies for what they can use their credit cards for, when they are permitted to do so, and how to access and update credit card information.
Many companies use online platforms for bill payment, such as those that allow them to pay their bills through a company website or with an app on their mobile device. This makes it easy for employees to see the many transactions coming in every day. New hires need proper training to ensure they don’t make common mistakes.
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Do you have more questions about how to protect your business accounts and securely transact business? One of our experienced Business Bankers will be happy to review our fraud prevention services and help you avoid future losses.
All the facts you’ll need to avoid fraud are included in our comprehensive Cybersecurity Awareness collection of articles and tools.
