Employee Fraud Prevention

Finding Your Bermuda Triangles

From birth to retirement, and everything in between, we plan. Unfortunately though, we tend to downplay the negatives. You know—those pesky 'what-ifs' and disasters we hope to keep at bay. Ironically, it’s in this world of unknowns that a solid plan is most vital.

Take, for instance, your business. It wants to grow, and with that growth come natural growing pains. For one, it gets harder to stay close to those at the heart of your company. But practically speaking, is there really any harm in that?

Could it be that losing touch could put your business in harm's way? Driver's findings may not inspire to action or instill a sense of urgency. You could assume your company is one of the seven—after all, the odds seem to be in your favor. So check out these hard and fast figures, and think again:

• Roughly 5% of annual revenue is lost to employee fraud
• 2014 saw a whopping $3 billion in fraud losses in the U.S. alone
• Small businesses—fewer than 100 employees—carry a higher risk, in the department of 28%
• About one third of businesses that fold owe their failure to employee theft

At its core, employee fraud is rationalized theft. And whether monetary, physical, or insurance-related, the cost could be crippling. In the 2014 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) found that losses ranged from $145,000 to a million or more. Factor in diminished customer confidence and a tainted work environment, and the negatives start to pile up. You could be left asking yourself: Why didn’t I work to prevent this? How could I be so naive? Can my company recover?

Obviously, there's a lot at risk. So instead of adopting the “it will never happen to me” mindset, let's get serious—this is definitely worth your precious time. Because like it or not, employee fraud is a sad ‘inevitable’ of conducting business. But by putting effort into prevention and protection—and by developing a reaction plan—you’ll soften the blow when it comes.

There Are Three Sides to This

Employee fraud wears many faces, from ordinary to unexpected, innocent to engineered. No matter the approach, the effects are real, and they hurt. So let's get defensive and learn from the statistics behind real-life disasters.

Why? How? What compels employees to stoop to fraud? Sometimes—and especially when staff numbers increase—a bad apple can slip in. And as your business takes off, what qualified as prevention and protection last year doesn't hold a candle to what's necessary today. On a happy note, most employees don’t start out as schemers.

Driver, the aforementioned lie detection expert, describes what she and others call the “fraud triangle” as being the key factor to employee fraud. According to Driver, when an employee (1) has access to company money, (2) is experiencing financial straits, and (3) isn’t happy in their position, rationalization quickly follows. In this triangulation of intense emotions, entitlement and a skewed sense of justice can take precedence over ethics. Once an employee’s mentality has shifted, they're on a slippery slope of justification that ultimately ends with your loss. But is there a way to change the game, mitigating fraud and its effects?

Your Natural Defenses

Let's be real: You own more than just a business—and that's exactly why your M.O. matters. Your decisions affect each and every employee, their families, their whole world. Do you honor and value that responsibility? If you take time to understand and improve your company’s culture, your actions are shouting a resounding, “Yes!”

Here’s simple but powerful advice: Keep in touch. Be that business owner who knows employees by name, sincerely inquires about their days, truly cares about their families' wellbeing. And go beyond the superficial—if others notice behavioral red flags, seek out the employee and listen, offer help if you’re able. Above all, create a work environment that thrives on open communication and genuine interest, not just in clients, but in your most valued assets: your employees. As an approachable, understanding boss, you're more than just pleasant—you're actually a built-in prevention to fraud. By helping employees to feel fairly rewarded and justly treated, you’re breaking down the “fraud triangle” and building on mutual trust.

Grassroots Improvement

Showing genuine, personal interest can go a long way toward employee fraud prevention. But let's not be silly: A sunny attitude isn't a panacea. We are complex creatures, and a multi-faceted approach addresses our complexities. So in addition to being everybody's favorite boss, you absolutely have to set some ground rules. And as your business develops, attention to detail should grow in kind. AllBusiness offers some top-notch pointers to help you protect your company:

• Clearly outline job responsibilities, avoid overlap between several high-risk duties
• Restrict authorization to sensitive financial or company data
• Thoroughly check into potential employees’ history, verify their claims
• Just as with cyber crime, educate employees on company policies, and how to identify fraud
• Promote and encourage information sharing through an anonymous reporting system
• Audits of financial records can show inconsistencies, and lessen temptation
• Be consistent and impartial: Whether large or small, investigate all incidents and violations

Right on—Now that's balancing protection and trust. Employees are treated fairly and equitably, yet still held to a high standard. The best part: They’re given a voice. Responsibility now falls on you to implement employee suggestions, and follow up on tip-offs. An employee who feels valued and has freedom of expression is less likely to turn to fraud, especially when they see that you're serious about improvements and change.

But that's the ideal. So what about the rogue, the un-ideal? Because sometimes, things are out of your hands. And in spite of a downright awesome work culture and brilliantly laid out policies, the 'worst-possibles'—the things outside of your control—get together and wreak havoc. So we ask: Once the alleged fraud is detected—an average 18 months could lapse—what is your planned response? How will you work through this, showing loyal employees that you can be fair and balanced in the face of potential disaster?

Suspending Disbelief

Regular audits can reveal inconsistencies that raise an eyebrow, even a flag. The general consensus: Take immediate forensic action. Gather all data related to the suspected fraud, from documents and/or computer files, to financial statements and records. Having all the facts from the get-go will give you a comprehensive vantage point. A word of caution though: This is not the army. Antagonistic or interrogative behavior could leave employees feeling like they're cogs in the machine of your success. You could easily undo all the good you've achieved; not to mention step on toes, or worse—employee rights.

After concretely determining that an individual or group of employees were involved in the scheme, some experts recommend suspension until everything's said and done. Rashly terminating a fraudster will only further jeopardize your company's security. Depending on the circumstances, consider bringing in a third party—say, your attorney, CPA, or a forensic accounting firm. They can help to sort through the details with a level head and an objective eye. Above all, holding to the "innocent until proven guilty" rule builds trust in your judgment, setting a precedent for inevitable future incidents. And just as with cyber crime, a down-pat response for media and company stakeholders can go far to manage negatives while working to reassure.

Down to (Your) Business

As a business-owner, by now you must realize that balance and an even-keel temperament are your best assets in dealing with suspected employee fraud. And if a situation overwhelms, or threatens to disrupt peaceful office operations, call in the experts! While unsettling to be sure, employee fraud is not a predicament you have to face alone.

With a quarter of the year almost past, it’s high time to ask: How’s your business doing? It could be that day-to-day concerns have forced you to overlook warning signs. Or maybe employee fraud was never on your radar to begin with. So hear this: It’s ok. Now that you’re aware, gaining deeper insight is the objective. You're well on your way to safeguarding your company. And while you're investigating options, why not take a look into available insurance coverage that could address your needs? Asking the advice of an expert—someone in the trenches—wouldn't be a bad idea either. Because no matter how you spin it, there’s a lot to consider. And ultimately, you're looking for the best protection for your company, your employees, and yourself. So rest assured: While this may be a new path you're forging, the resources you need are closer than you know.