It’s natural to assume you’ve surrounded yourself with honest, trustworthy people. Nowhere is this more important than when running a business. Unfortunately, even if you hire and retain employees you trust, employee fraud can still occur.
Year after year, hard-working business owners suffer setbacks that affect personal relationships, company culture and finances. In fact, the Association of Certified Fraud Examiners recently estimated that businesses lose 5 percent of revenue to fraud and that the median loss from just one case was $150,000.
So how can you protect yourself as a small-business owner? There are several steps you can take to reduce the risk for employee dishonesty and decrease the likelihood of fraud, both intentional and unintentional:
- Do your homework when hiring. During the interview and vetting stage, conduct low- to no-cost background and credit checks. Information on a credit report can give you valuable insights about the person you’re considering for employment. Also be sure to call a candidate’s references.
- Educate your employees. Employees, especially those working in small businesses, need to understand their work boundaries. Create a document spelling out the rules of your company (Code of Conduct), with explicit guidelines on penalties for violating the rules. Require employees to sign an acknowledgment that they’ve read and understand your business’s Code of Conduct. You might also consider paying an outside fraud education vendor to conduct training for employees or purchase employee training videos on fraud prevention.
- Publicize and encourage anonymous fraud reporting. According to the Association of Certified Fraud Examiners, employee fraud was detected most often through tips. Provide employees anonymous ways to report suspicions of co-worker fraud or theft 24/7, since they may prefer to make these reports outside of work. Some options could include:
- custom email address
- dedicated phone number
- web portal
- fax number
- Separate financial functions. Avoid having one employee control both the processing and reporting of finances. Separate accounts receivable and accounts payable functions, and divide payroll tasks. For example, payroll might be prepared by one person, entered by another and approved by management.
- Cover your bases. Use an inventory tracking system and check inventory regularly, but conduct periodic spot checks without warning. If you’re using a computer-based system, change entry codes from time to time. Have scheduled (every 6 to 12 months) and surprise audits to review your company’s bookkeeping.
- Watch for common-sense signs. Too often, people ignore their gut feelings. They assume they’ve misjudged a situation or don’t look into a questionable employee decision to avoid conflict or offending someone. If you’re a business owner who suspects potential fraud, investigate it. The vast majority of fraud discovered isn’t a huge disparity or large employee act that gives it away. It’s revealed in the minor hiccups in operations or small deviations from the rules.
If you’re worried about employee fraud, talk with a Navy Federal Credit Union business development officer about how you can fund the fraud protection you may need.