Employee Fraud is a Big Problem for Small Businesses
Few entrepreneurs who run small enterprises ever consider the fact that their companies are at risk of falling victim to employee fraud and abuse. Yet an internet search of the topic reveals hundreds of headlines showing the incredible range of employee frauds, the regularity of their occurrence and the often-devastating impact these frauds have on the companies who suffer them. From stealing company funds, to sales reps lying about product capabilities to sell more products, to employees stealing company data, risks abound for small companies.
Employee Fraud Statistics
The Association of Certified Fraud Examiners estimates that businesses lose 5% of their annual revenue to employee fraud and abuse. Small businesses—particularly those that have fewer than 150 employees—are the most vulnerable to employee fraud schemes. They are also more likely than larger companies to experience a catastrophic loss from fraud because they lack appropriate internal controls and owners lack awareness of the risks their companies face from insider threats.
What’s the likelihood that your business will fall victim to an employee fraud scheme? Consider this: 75% of employees have stolen from their employer at least once, according to the U.S. Chamber of Commerce. The Chamber also found that up to 30% of business failures may be the result of employee fraud and abuse.
Zeroing in on just one type of employee fraud—embezzlement—provides a clear picture of the disparate rates of occurrence of fraud within small and large organizations. A report on white collar crime released by the insurance company Hiscox found that over 80% of thefts occur at companies that have fewer than 150 employees, half occur at companies with 25 or fewer employees.
Types of Employee Fraud Schemes
Employee fraud schemes can come in many forms and sizes. The most common include:
- Check tampering (e.g., stealing blank checks)
- Payroll schemes (e.g., ghost employees, paycheck diversion, unauthorized pay rate alteration)
- Billing schemes (e.g., fake invoices, dummy vendors)
- Expense padding (e.g., submitting reimbursements claims for expenses not incurred).
Take a look at this story told by a woman who never set out to steal from her employer, but ended up embezzling $500,000 in just 18 months.
Small business owners often have a false sense of security about their insider threat risk. They are high in trust because they frequently know all or most of the people working for them. Because they know them, they are confident that none are bad people who would steal from them. However, here’s a statement that may shock you: embezzlers don't often look and act like bad people. In fact, studies show that most people convicted of employee fraud schemes appear to be otherwise good people who made very bad decisions. More often than not, these situations start out as crimes of opportunity rather than premeditation. So eliminate the opportunity.
Tips for Protecting Your Business from Fraud
Protecting your business from employee fraud and abuse is an ongoing process that any business owner can master. Here are five things you should consider doing right now to get started:
- Conduct a fraud risk assessment to understand your exposure. Ask your accountant to help with this or seek out a fraud risk assessment tool.
- Know your numbers. It’s essential that you review financial statements for your company regularly—quarterly at a minimum, but monthly is best. Watch for any unusual or unexpected changes and ask questions. Not comfortable reading financial statements? Invest in learning the financial basics every business owner should know.
- Segregate duties. No employee (or paid advisor) should have end-to-end control over your company’s finances. Learn which aspects to assign to different people to ensure there are proper checks and controls in place.
- Conduct an anti-fraud training for your staff at least once a year. This will let your employees know that you are aware of fraud schemes and that you are paying attention.
- Cultivate a culture of integrity. Adopt a code of conduct and make sure that your employees know that you expect them to behave ethically at all times.
Failing to proactively take steps to protect your business from employee fraud schemes is like leaving the door to a vault holding your valuable assets unlocked and unguarded. You wouldn’t do that, so don’t leave your company unprotected either. It’s worth your time to create and implement a plan—unless of course, you’re okay with rolling the dice and hoping that your business doesn’t end up among the 30% that fail due to employee fraud. If you’re okay with that, then by all means, carry on. If not, take the steps needed to understand and address your risks today.
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