Preventing and Stopping Employee Fraud

Most entry level national chains kick off the hiring process with a fifty to one hundred word questionnaire. The questionnaire is often the first attempt to eliminate bad employees.

Personally, I’ve always found these types of questionnaires fairly useless. It’s fairly easy to determine what the hiring manager wants to hear. The right answer is never clearer than when potential employees are faced with questions meant to weed out individuals who might commit fraud.

Smart and unscrupulous job candidates who plan to rob the company blind, know to answer no to questions like would you take product off the shelf and bring it home or if there were extra post-it notes, would you take them home? Questions meant to detect potential fraud might occasionally weed out a few bad candidates, but not enough to truly safe guard companies.

And the concern over employee fraud is problem that all businesses, not matter the size, should be proactively guarding against. According to Boston University’s infographic, Is Your Business Ready for the Next Man-Made Disaster?, 45 percent of organizations in the US have been affected by fraud.  Of those organizations, 54 percent reported that the fraud exceeded $100,000 and 8 percent reported that the fraud amount to over 5 million dollars.

How can you prevent fraud?

The biggest barrier, especially for small businesses, is to become knowledgeable about the different types of fraud you might encounter as a small business owner. If business owners know what they should be looking for, there is a higher chance that someone will notice the stolen goods or money. Below are the six most common types of fraud and how often businesses encounter them:

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Asset Misappropriation: When employees or third parties who manage company assets (finances, company data, or intellectual property), steal from the company.

This type of fraud can involve creating:

  • a fake employee.
  • false invoices.
  • false expense claims.

Cybercrime: when employees utilize technology to steal from, sabotage, or blackmail a company.

This type of fraud can involve:

  • Utilizing current or stolen credentials to steal credit card information, account details, and other data from either customers or the company.
  • Use of Malware to steal sensitive information.
  • Stealing copyrighted material that may or may not be open to the public.

Procurement Fraud: Procurement has to do with the acquiring and purchasing of works and services from a third party often through a bidding process. Procurement fraud often deals with individuals in charge of the procurement process underhandedly gaining an advantage, avoiding an obligation, or causing a loss to the company. Procurement fraud can involve individuals:

  • Taking a bribe to choose a higher cost service during a bid.
  • Granting insider knowledge to bidders.
  • Submitting false invoices.
  • Purchasing lower quality material and pocketing the excess money without permission.

Accounting Fraud: Accounting fraud involves individuals within the company misrepresenting the financial state of the company to mislead current and potential investors and shareholders.

This type of fraud often involves:

  • Exaggerate company revenue and assets.
  • Not recording some expenses.
  • Under stating liabilities.

Intellectual Property Infringement: violation of intellectual property right. This can often involve stealing copyrighted, patented, or trademarked data or material.

This type of fraud often involves:

  • Stealing and publishing copyrighted copies of work online.
  • Leaking trade secrets or the make-up of copyrighted material to competitors or for employees own use.

Bribery and Corruption: Individuals taking bribes for favors either within or outside the company.

This type of fraud can involve:

  • Giving promotions or perks based on employee bribes.
  • Choosing contracts and making corporate decisions based on bribes provided by individuals outside the company.

The ability to identify fraud is only the first step in what can be a very complicated and very difficult process. When creating an anti-fraud strategy, small business owners should:

  • Conduct annual fraud risk assessments.
  • Encourage employees to report any cases of potential fraud.
  • Be ready to evaluate any fraud reports outside the company.
  • Conduct annual internal audits. Audits should probably be overseen by individuals who don’t directly make accounting decisions.
  • Set up a whistle blower mechanism that does not penalize employees for reporting potential fraud.

Employee fraud can lead to massive company monetary loss. Monetary loss that small or medium sized businesses cannot afford to lose. To prevent employee fraud, business owners need to familiarize themselves with the most common types of fraud and implement procedures designed to identify fraudulent activity as early as possible. The sooner the fraudulent activity is identified, the less money you could potentially lose.

Image credit: MSM Online

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