Protecting Your Business from Employee Fraud: Strategies and Best Practices

Fraud is typically perpetrated by individuals you trust. While most employees are trustworthy, organizations still fall victim to fraud each year. As a dedicated business owner striving to build and grow your company, prevention is key. You need to trust, but you also need to verify.

Mature, long-standing employees often commit more fraud than newcomers, as they gain both trust and access. Fraud may begin when financial pressures prompt an employee to “borrow” from the company, with intentions to repay. This can be triggered by issues like gambling, addiction, or personal resentment.

Employee fraud can result in substantial financial losses and reputational damage. Money stolen is rarely recovered, underscoring the importance of prevention. In this blog, we will explore strategies and best practices to safeguard your business from employee financial fraud, with a focus on owner-managed businesses and smaller organizations. While larger companies may employ tactics like employee hotlines and financial audits, these tips are practical for all:

1. Background Checks and Screening
Before hiring new employees, conduct thorough background checks and reference screenings to identify potential red flags. Look for inconsistencies in their resume, criminal records, or prior fraudulent behavior. Verify references by contacting past supervisors.

2. Clear Policies and Procedures
Implement clear and comprehensive company policies and procedures outlining expectations for ethical behavior, financial transactions, and the process for reporting suspected fraud. Ensure all employees are aware of these policies and provide training for clarity.

3. Segregation of Duties
Implement a system of checks and balances by segregating duties among employees. For instance, those responsible for making payments should not reconcile accounts. This division reduces the risk of undetected fraudulent activity.

4. Review Statements and Ask Questions
Regularly review paper or electronic bank and credit card statements. Investigate any unfamiliar vendors or transactions, asking for invoices and receipts. Make it known that you review expenses, promoting ethical behavior.

5. Strong Access Controls
Enforce strict access controls to safeguard sensitive financial and operational information. Only authorized personnel should have access to critical systems and data. Update access privileges as employee roles change.

6. Regular Employee Training
Provide ongoing training to help employees recognize fraud indicators, promote ethical conduct, and emphasize the importance of reporting suspicious behavior. Communicate the consequences of fraud and the benefits of a fraud-free workplace.

7. Use Technology Safeguards
Leverage technology with fraud detection capabilities in accounting software, secure payment processing systems, and alerts for unusual transactions.

8. Vendor and Supplier Due Diligence
Conduct due diligence on vendors and suppliers to ensure their legitimacy. Some employee fraud schemes involve external collusion, so maintain transparency in your supply chain. Periodically review vendor lists and be cautious of near-duplicate vendors to prevent fraudulent payments.

9. Legal and Disciplinary Action
Clearly define the consequences of employee fraud in your company policies and be prepared to take legal and disciplinary action upon discovery. Pursuing legal action sends a strong message that fraud will not be tolerated.

Protecting your business from employee fraud requires ongoing vigilance, clear policies, and proactive measures. By implementing these strategies and best practices, you can significantly reduce the risk of employee fraud, ensuring the long-term success and security of your business. Being proactive in safeguarding your business is always preferable to dealing with the aftermath of fraud.