Preventing workplace fraud by employees

As someone who regularly investigates allegations and instances of fraud, I’m well aware of the devastating toll that an act of fraud can have on a business. It’s a topic I’ll be exploring, analyzing, and discussing in this and future posts.

The Association of Certified Fraud Examiners’ 2012 Report to the Nations, released earlier this year, listed the median workplace fraud loss at $140,000, while many caused a loss greater than $1 million. The study reported that almost one-third of all instances of fraud occur at companies with less than 100 employees.

Those are breathtaking numbers, making the prevention and detection of workplace fraud a serious issue for businesses, especially small businesses.

However, proactive measures can be implemented to help prevent fraud at companies of every size. My colleague Steve Franklin discusses some fraud prevention strategies in a recent CBIZ BizTips video, posted below. In the video, Steve explains why companies should mandate time off, cross-train employees, and receive statements directly from the bank.

From my experience working as a fraud investigator and forensic accountant, I’ve compiled four other tips that can deter employees from committing -- or even thinking about committing -- fraud.

1. Set up a fraud hotline
Set up an anonymous fraud tip hotline, and encourage employees to use it if they suspect fraud.

This is by far the best -- and cheapest -- way to prevent and detect fraud. According to the ACFE, tips are the number one method of detection. In 2012, fraud was detected via a tip in 42.3 percent of the cases included in the ACFE’s study. This is up from 40.2 percent in 2010.

2. Perform background checks on employees
Do you know who you’re hiring?

Even the most stellar, pedigreed interviewees can have skeletons in their closets. Before bringing anyone on board, conduct a background check. Don’t rely only on recommendations -- about 15 percent of fraudsters are repeat offenders.

This goes for relatives and friends too. When it comes to your business, you can never be too careful.

3. Maintain current, accurate accounting records
Demand to receive accurate accounting records on a regular basis. Accurate accounting records make hiding fraudulent activity more difficult. Lapses in staff ability to produce these could indicate that the accounting department is understaffed and could compromise a system of internal controls that make hiding fraud easier.

4. Review computer security for proper administrative and access rights
Computer access should be limited to job functions and include offsite back-ups in case of emergencies.

Computer access to sensitive information, inventory, billing, or accounting records should be limited and have an appropriate division of duties.