If you own or operate a small business, chances are you’ve worried about one of your employees stealing from your company. Your concerns are well founded—the typical company annually loses 5% of its revenue to fraud, according to the most recent Report to the Nations published by the Association of Certified Fraud Examiners (ACFE).
Employee embezzlement isn’t something most companies can choose to ignore—with a median loss of $150,000 per fraud scheme—and as much as an employer may trust his or her employees, trust isn’t an effective fraud-prevention technique.
The ACFE consistently reports that companies with active fraud-prevention strategies incur as much as 54% fewer fraud losses and that losses are detected up to 50% faster than companies that lack these measures. With the average fraud scheme lasting 18 months, detecting fraud early means reducing the impact on a company’s bottom line.
There’s no one-size-fits-all approach to fraud prevention and detection. Taking a balanced approach that focuses on three key areas—company culture, employee education, and internal control review—helps companies mitigate fraud risks without inundating employees with policies and procedures that can negatively impact productivity and cost efficiency.
Fraud prevention begins with company culture and employees who understand what behavior is acceptable. Humans are social animals whose actions are often governed by the culture and environment in which they find themselves. As such, maintaining a policy of ethical behavior at all levels of an organization is integral to fraud prevention.
Establishing a written code of conduct that’s regularly reviewed with employees is often the first step toward creating a company culture that discourages fraud. Encouraging employees to report conduct that isn’t in accordance with company policy while exemplifying this code of conduct at the leadership level goes a long way toward generating the desired culture of accountability.
More than 40% of employee fraud is detected and reported by fellow employees, according to the ACFE, making it by far the most common detection method. Working to ensure employees know what to look for and that they’re comfortable communicating their concerns can often result in more instances of fraud being identified quicker.
Coworkers are a company’s first line of defense in fraud detection, which means arming employees with fraud knowledge and safe communication methods should be a focus of any fraud prevention strategy. Employees should be knowledgeable about which warning signs to look for in their coworkers:
- Lifestyle changes
- Close vendor or customer associations
- No vacation time
- Personal financial difficulties
- Substance abuse
Once employees know what to look for, establishing an anonymous fraud hotline can encourage employees to report suspicious behavior without fear of repercussion.
Internal Control Review
It’s critical for companies to evaluate their internal controls, no matter the size of the organization. Identifying and closing the gaps that an employee could use to commit fraud isn’t foolproof, but it can make it significantly more difficult to perpetrate the fraud—enough for an employee to look for easier alternatives elsewhere.
Reducing fraud risk to zero often isn’t possible, regardless of which practical antifraud measures a company employs. However, intentionally setting company culture and tone, educating employees, and evaluating accounting processes and procedures can reduce exposure—giving business owners greater peace of mind.
We’re Here to Help
For more information on the steps you can take to prevent fraud, contact your Moss Adams professional.