Open lines of communication and fair employment practices will go a long way toward reducing fraud.
There’s a principle in fraud prevention circles known as the 10-10-80 rule. According to the rule, 10% of employees will not steal under any circumstances, 10% will steal at any opportunity and 80% of employees will steal if they can rationalize the act.
Small businesses are especially vulnerable to employee fraud and theft, and they are often less able than big corporations to absorb such losses.
The first step to preventing employee fraud is to screen job applicants carefully. Before hiring a new worker, you should conduct a thorough background review that includes a criminal history check and drivers abstract scan as well as verification of education and credentials, past employment and reasons for leaving, and references.
Consider running a credit check on prospective employees, especially those who will handle money or deal with financial matters. To obtain a credit report, you are legally required to notify job applicants in writing and to obtain their written consent.
In addition to screening employees, always follow these basic accounting controls:
- Never allow your business finances to be handled exclusively by a single individual.
- No employee should be responsible for both recording and processing transactions.
- Don’t allow the person who sends out bills to collect the mail and prepare bank deposits.
- Reconcile bank statements at least once a month and conduct random audits or have an outside auditor review your books periodically.
- Make sure all checks, purchase orders and invoices are consecutively numbered.
- Mark incoming checks “for deposit only” so they cannot be cashed.
- Require all checks above a specified amount to have two signatures.
- Never sign a blank check.
- Sign every payroll check personally.
- Avoid using a signature stamp.
Follow up personally if a customer says that they have not received credit for a payment.
Open bank statements and examine canceled checks carefully for red-flag items such as missing check numbers. Look at the checks that have been issued, to make sure the payees are legitimate and signatures are valid.
Review accounts payable by checking cash disbursements and payments.
Finally, be clear with employees that your company has zero tolerance for fraud or theft of any sort. Write and distribute a company policy that spells out what constitutes fraud and specifies the consequences. By establishing internal controls and letting employees know that you are vigilantly looking out for fraud, you can prevent many of your employees from committing fraud.
In addition, a positive work environment has been shown to help deter employee fraud. Open lines of communication and fair employment practices will also go a long way in helping to reduce the problem.