The Financial Losses Associated With Employee Theft And How To Combat Them

Article-1-imageMany business owners, especially those in small to medium businesses such as security providers, integration and installation companies, assume that employee fraud happens only in very large organisations that have hundreds of employees and a large volume of transactions. In fact, employee fraud can happen in all businesses in a number of different ways.

In smaller organisations, where multiple responsibilities are shared amongst fewer staff, the resulting incompatible job tasks offer greater opportunity for fraud. For example, maintaining petty cash, preparing journal entries, processing payments and preparing account reconciliations could provide the main ingredient for individual fraud – opportunity.

Even the most trustworthy employees can succumb to financial pressure. Loss of or decreased household income can place individual employees in challenging, sometimes unprecedented financial situations. An action that may have been completely out of character is intensified by financial pressures, and when you combine this incentive with opportunity, little rationalisation is needed to drive an employee to commit fraud.

Security business owners need to adopt a proactive stance to prevent fraud from entering into their organisation. It is important to establish and focus on effective fraud-prevention controls instead of fraud detection. The challenge for business owners is that they are intent on reducing costs, not increasing them by introducing necessary internal controls to prevent fraud. Nevertheless, one economical method used to prevent fraud is disseminating the entity’s fraud-reporting policies and programs to its employees, as well as its customers, suppliers and other stakeholders.

This approach informs everyone associated with the business of unacceptable behaviours, as well as also what to look for. A recent study by the Association of Certified Fraud Examiners found that over 40 per cent of fraud incidents were detected by tips, made mostly by employees and customers.

Expense Claim Fraud

With employees, the most common type of fraud is with expense claims, wherein employees will claim for personal expenses or overstate reimbursements. Whilst this may appear immaterial, a fraudulent $1,000 expense claim made every month can add up.

Smaller organisations need to ensure that they have an appropriate checking mechanism in place for reviewing reimbursement claims, that receipts are collected at all times, and that expense claim forms are processed and signed off by the relevant person. All expense reports should be signed off by an independent party and spot checks on expense claim forms should be made to ensure integrity. Consider if the expense claims are appropriate or excessive and if they meet with the organisational guidelines.

Further Steps

Businesses should implement fraud-risk assessments, which involves conducting comprehensive analysis of fraud-risk tolerance, identifying areas that are most vulnerable to fraud and examining existing fraud-risk policies and procedures to determine if they are adequate. Recognising risk spots determines where prevention and detection mechanisms should be placed. Organisations should also establish detection mechanisms; executives can use a combination of internal audits, surprise audits and senior management reviews. Business owners and managers must ensure that if fraud is detected, a rapid-response plan with strategies for investigating, reporting and prosecuting misconduct, fraud or corruption is implemented. The response that you undertake demonstrates to employees the seriousness with which you treat such incidents. Legal requirements to report fraud to the police vary in each state, but notification to police of any suspected fraud is appropriate.

Recovery Options

When detecting fraud, it is critical that the company acts quickly. It may be that the employee has had the opportunity to disburse the funds, and in some instances the funds are still held in bank accounts or valuable assets at the point of detection. Moving swiftly enhances the prospects of recovering the defrauded funds.

An injunction may offer the quickest and most effective means of recovery. If granted by the court, injunctions can freeze property and assets and allow the company to obtain information to assist in the recovery of defrauded amounts. Injunctions are only granted where the employer is able to establish that the fraud has been committed, the damage to the company is significant and there is a strong likelihood that the assets will be dissipated by the time a final judgement is entered.

The evidence would suggest that recovery is difficult, as the defrauded funds have usually been spent by the employee and little, if any, assets exist. In this respect, prevention remains the best strategy for any business in eliminating or minimising the impact of employee fraud.