Protect Your Company & Customers Against Employee Fraud

No business owner likes to think his or her personnel could be dishonest - until it's too late. Employee fraud not only drains hard-earned revenue, it also affects how your company is perceived by customers, suppliers, and vendors. In addition, the often-close relationships business owners form with trusted employees adds a personal dimension when that trust is violated.

Perhaps the most important steps you can take in preventing employee frauds are conducting background checks before workers are hired, and monitoring your company financials closely.

Background checks, while not foolproof, can help you identify common warning signs such as a person who has had past legal or employment problems, or has misrepresented their employment history during the application process.

As part of your employment process, it’s also helpful to have written zero-tolerance policies that state workers will be dismissed without warning.

Divide Responsibilities

It’s also critical to make sure that you have more one person playing roles in your company’s financial processes, because allowing one person to have broad responsibly makes it difficult to detect financial fraud or other misdeeds.

For example, have one employee create and make bank deposits, and have another employee reconcile bank statements. If you run a retail store, have a different employee reconcile cash registers at the end of the workday.

Most instances of financial fraud start small, often with a trusted employee taking money they intend to repay in the wake of personal financial problems. If they can’t repay funds they’ve “borrowed,” the fraud continues and often escalates.

Here are some additional steps you can take to protect professional and personal assets from employee fraud.

Financial

• Sign all checks personally. Get rid of the "check stamp." If that sounds too time-consuming, require two signatures on checks over a pre-determined amount. That way you'll create a system of checks and balances to ensure no one person has the authority to make major purchases without authorization. Audit your checks on a regular basis to make sure none are missing.
• Keep checks and financial documents in a safe place. Restrict access only to those who truly require access.
• Use financial software to generate checks to reduce the risk of checks being stolen or altered before deposit.
• Eliminate petty cash. Set up accounts with vendors and suppliers. Use purchase orders and invoices.
• Set limits on purchase approval. Decide your "purchase pain" threshold, and limit purchases in excess of that amount to a select group of employees - or even to yourself.
• Hand out paychecks personally. If you run a small business, you know all your employees. If your employees run in the hundreds, it could be easy for someone to create a "phantom" employee and pocket their "earnings." Handing out checks not only lets you keep track; it also lets you say "thank you" to your employees for their hard work.
• Keep original copies of all purchase orders and invoices. Have multiple people responsible for counting, ordering, and checking in inventory.
• Have an outside accountant review your books on a regular basis. A fresh set of eyes can catch discrepancies or problems you might otherwise miss. Audit payroll records on a regular basis. Match timecards and work hours with payroll records in case there are "phantom" employees or overstated work hours.
• Perform credit and reference checks on all businesses to which you may extend credit. Credit and reference checks are your best defense against fraud - and against offering credit to companies or individuals who are not in a position to make good on the debt.
• Run regular business credit checks. Identify misuse of company accounts or accounts created without your knowledge.
• Shred sensitive information. Retail stores and restaurants take in massive amounts of customer information including credit card numbers. Shred all documents containing personal information including unused or unneeded credit card charge slips.
• Immediately investigate if you suspect fraud.

Property and Data

• Lock all doors and restrict access to specific areas. Office employees do not need access to spare parts, and shop-floor employees do not need access to financial documents.
• Maintain an up-to-date list of equipment and supplies. Know what your business owns and make sure it stays where it belongs.
• Assign keys and electronic keys. Check periodically to make sure assigned keys have not been lost or stolen.
• Password-protect all computers and programs. Use strong passwords, and change those passwords frequently.
• Perform regular data backups.
• Keep all sensitive information in locked drawers and cabinets. Limit access to those files on a "need to have access" basis.
• Reclaim all keys and badges when employees are terminated.

Identity

• Keep customer files in restricted areas. Never let employees take files containing employee or customer information from those areas (especially to their homes). While working from home may make sense, segregate sensitive information from other data or information that can be safely used outside the office.
• Keep company files in restricted areas. Pay special attention to employee files containing personal information; your files likely contain addresses, Social Security numbers, bank-account numbers --data that can be used to steal another person's identity.
• Never put Social Security numbers on employee paychecks.
• Dispose of sensitive data properly. Shred paper files and format hard drives. Create policies and procedures for properly disposing of any physical or electronic data and make sure those procedures are followed consistently.

No matter how hard you try, it can be difficult to eliminate all employee fraud. Consider adding employee theft and fraud coverage to your business insurance policy; that way if the worst does happen you may at least be able to minimize the financial repercussions.