10 Ways to Prevent Employee Theft and Fraud

Employee theft is one of the most serious problems facing small business owners in the U.S. According to the National Federation of Independent Business (NFIB), an employee is 15 times more likely than a non-employee to steal from an employer, and employees account for an estimated 44 percent of theft losses at stores. The U.S. Department of Commerce reports that nearly a third of business failures are related to employee theft or fraud. 

Business owners are rightly concerned – or should be. Employee misdeeds take many forms:

  • Larceny (outright theft)
  • Skimming (diverting business funds)
  • Fraudulent disbursements (billing schemes, inflated expense reports, check tampering)
  • Embezzlement of raw materials or inventory
  • Stealing business opportunities (misappropriation of customer lists or other trade secrets).

Companies that insure small businesses against fraud have become alarmed by the losses and encourage owners to become even more vigilant.

Employees who steal typically have worked at a business for several years before starting to steal and continue for an average of three years before they get caught. That’s a lot of time to generate losses for the business. Here are some things you can do:

Employee Stealing

1. Know your employees. Be alert to key indicators of potential theft such as:

  • Sudden, apparent devotion to work and working late.
  • Lifestyles well above salary levels.
  • Strong objections to procedural changes related to financial, inventory or supply matters.
  • Drugs and alcohol abuse.
  • Moonlighting with materials available at the business.
  • Evidence of compulsive gambling, persistent borrowing or bad check writing.

NFIB recommends that small business employers perform background checks on potential hires. Checking references is one important step. But for employees entrusted with handling your money or financial records, a background check is better.

2. Supervise employees closely. Not surprisingly, studies show that when supervision is lax, theft and fraud rates go up. This doesn’t mean looking over their shoulder every minute. But it does mean checking what they do. It’s also wise to have more than one person looking out for your money.

3. Use purchase orders. The payment, receipt and preparation of purchase orders should be separate functions and handled by different individuals. Use serially pre-numbered purchase orders and always verify incoming orders.

4. Control cash receipts. Use serially pre-numbered sales slips and conduct weekly audits. Balancing of sales slips and register receipts should be done by someone other than the sales clerk.

5. Use informal audits. Make unannounced internal audits and have a yearly audit performed by an outside firm.

6. Install computer security measures. Understand your computer systems and software, and how they might be used to divert money or inventory. Restrict access to computer terminals and records. Periodically change entry codes and check regularly to ensure that security procedures are in effect.

7. Track your business checks. Always use pre-numbered checks, with amounts and payees typed or written in permanent ink. Producing all checks from financial software such as QuickBooks is highly recommended. Lock blank checks and a signature machine, if you have one, in a secure place.  

8. Manage inventory and use security systems. Separate receiving, store keeping and shipping functions. Physical inventories should be done annually by individuals who are not responsible for inventory records. Some businesses also install security devices to monitor merchandise or inventory.

9. Beware of accounts receivable. Make mail-opening and posting separate functions. Record checks and cash in appropriate registers and stamp checks for deposit only.

10. Provide a way for employees to report theft or fraud by co-workers. This needs to be done carefully to avoid signaling you don’t trust employees. But it can be highly effective. 

If you suspect a problem, attorneys at the Small Business Legal Center offer this advice;

  •  Be extremely careful about making accusations and conducting investigations – a false accusation can result in a lawsuit against you.
  •  Verify suspicions by investigation, and determine the extent of fraud and methods used.  If you can identify the responsible employee, terminate their employment and consider further legal action.
  •  If it is a large or complex issue, consider involving legal counsel who can assist with finding additional experts such as forensic accountants or investigators.

 

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About the Author

Daniel Kehrer, Author headshotDaniel Kehrer, Founder & Managing Director of BizBest Media Corp., is a nationally-known, award-winning expert on small and local business, start-ups, content marketing, entrepreneurship and social media, with an MBA from UCLA/Anderson. Read more of Daniel's tips atwww.BizBest.com, follow him at www.twitter.com/140Main and connect on LinkedIn at www.linkedin.com/in/danielkehrer.
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