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For businesses in the United States, employee fraud is one of the most significant risks they face, especially small businesses.
An employee is 15 times more likely than a non-employee to steal from a business. Employees make up around 44% of all theft losses at retail companies. According to data from the U.S. Department of Commerce, almost a third of business failures relate to employee fraud or theft.
Some of the most common types of employee fraud include outright theft, also known as larceny, and skimming which means the diversion of business funds.
Fraudulent disbursements, embezzling raw materials, or stealing business opportunities such as customer lists are other common forms of employee fraud.
The following are some of the best ways to reduce the risk of fraud in your business, or at least mitigate the fallout if it does occur.
Use Automation
If you automate workflows wherever possible, such as the automation of your accounts payable process, there are a lot of ways this has the potential to reduce fraud.
First, using an automation platform will give you centralized visibility into everything that’s happening, which you can’t ever have if you stick with paper documents and manual processes. When you choose automation solutions for critical business areas like AP, you can log on anytime you want to see the activity going on and who’s doing what.
You can also set rules for things like invoice approval, making it harder for your employees to go outside of those guidelines.
By having automated solutions, you’re able to put internal controls into place.
Sometimes the fear of getting caught because of rigid internal controls is enough to deter any bad behavior. Just knowing that as a business, you’re automating workflows and there’s centralized visibility could be enough to reduce the risk that you’re the victim of fraud in a significant way.
Separate Financial Duties
There are specific roles in a business that deal with money and financials that you should not only be automated but segmenting duties for.
In small businesses, in particular, you’ll often see that one person handles everything related to bookkeeping. This might include paying invoices, managing petty cash, and processing payments.
That makes it much easier for fraud to occur and to go unnoticed for potentially extended periods.
Even in a very small business, you should have at least two people in charge of managing these cash and accounting functions.
Another option if you are small and maybe don’t have the internal resource to separate financial duties is to use a virtual CFO. Many accounting firms offer virtual and outsourced options for this.
Be Careful When Hiring and Get to Know Your Employees
You may be desperate to hire anyone right now. Many places are understaffed, following the pandemic for a multitude of reasons. For some people, there is a fear of returning to work because of the continuation of the threat of COVID-19. Some people are willing to leave their jobs more easily than ever before.
All of this means that you could be scrambling to fill positions, but don’t put your business at risk in doing so.
You should maintain a formal hiring routine, and you should always conduct background checks but especially for roles that will involve handling payments or cash, as well as customer financial information.
The more a potential employee might have access to finances, the more you should scrutinize their past as you’re hiring them and their present as they’re working for you.
Once you hire someone, take the time to get to know them. This will help you identify any red flags early on.
For example, someone living a lifestyle that you think is far above their paygrade might be something that leads you to watch their activity a little closer.
If there are sudden changes in someone’s behavior or appearance, this could tip you off that something else is going on.
You have to learn the difference as a business owner between supervision and being mindful of what’s going on in your business and micromanaging. Micromanaging isn’t productive, and you don’t need to do it to prevent fraud. You do need to be mentally and physically present, however.
Make It Easy for Employees to Report Fraud or Theft
You want to train your employees to keep an eye out for fraud because you can’t do it all independently.
At the same time, you never want to indicate you don’t trust your employees, so this can be a balance you have to find.
Let your employees know what fraud is and what the signs are. They should know how to report suspected fraud anonymously and without any fear of retribution.
When employees see that you are training everyone on how to recognize fraud, then it indicates to them that you know what’s going on.
Other Tips to Avoid Fraud
Some other general things that you can put in place in your business to avoid fraud include:
- Use purchase orders. Then, paying, receiving, and preparing purchase orders should be done by different people whenever possible. You should verify incoming orders and use purchase orders that are pre-numbered.
- Do informal audits. You can do an informal and unannounced internal audit once a year, and then you might hire an outside company to do a yearly audit as well.
- Understand your own computer systems, and learn about how they could be used fraudulently.
- As far as accounts receivable, you want to open the mail and post separate job duties done by different people.
- Know your business partners. Don’t get into business with someone that you don’t know and trust well in any capacity.
Finally, it might be a good idea to invest in insurance that will protect you if your business is the victim of fraud. The losses can be substantial, and even with the best controls in place, there’s always a risk.
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