How to Protect against Employee & Business Fraud

AccountingArtificial intelligence

According to a Forbes Report, 30% of businesses fail due to employee fraud. What’s surprisingly interesting is that most of these fraudulent activities can be prevented. This means that most entrepreneurs leave the door to their vaults unlocked and unguarded. Any serious entrepreneur should proactively take measures that protect their business from fraudulent activities. It is only fair that you take the time to prevent fraud, rather than suffer the consequences. In this article, we guide you through the different ways that you can prevent employee and business fraud. 

The different types of Business Fraud
Before we go further on the measures to protect against the employee and business fraud, let’s get acquainted on the most common types of business fraud:Corruption- This happens when employees use their position or influence for their benefit. Examples include extortion, conflict of interest, and bribery. Asset misappropriation- This is where an employee steals and exploits the organization’s resources. Include activities such as taking non-cash items from the organization, stealing cash, or making false reimbursement claimsFinancial statement Fraud-These are schemes that involve omitting or knowingly misstating information in the company’s financial reports.

Conduct training to prevent fraud
The first step towards fraud prevention is educating your employees and yourself on matters of fraud. It is simple, you cannot detect or prevent what you do not know. Train yourself and your employees on fraud and fraud prevention. Ensure that they can detect the warning signs of fraud and can prevent it. Simple fraud prevention tactics such as password protection, unraveling omissions should be at their fingertips. You can then back these training (s) by establishing a reporting system preferably an anonymous one where employees can report suspicious behavior or actions of their coworkers. This training should be conducted occasionally to keep up with the ever-evolving fraud trends. 

Review your hiring practices and include background checks
While you can’t prevent every instance of fraud from happening to your business, you take precautions that help you minimize fraudulent activities. One way of doing that is ensuring that you are bringing the right people to your organization. You do not want to finalize on a new hire then realize that you have just hired a wanted criminal! It is vital to conduct background checks on all employees before making them part of the team. It is best to conduct private investigations on your potential hires before you engage them. Do the same for any other business you would like to work with as well. A point to note though; it is always ethical to inform them that you will be conducting a background check on them as part of the HR requirement. 

Safeguard your internal records
Another way of preventing fraud is creating and maintaining internal records. As a small business, you might not deem this as necessary, while it actually is, given the cases of fraudulent activities happening among small businesses. Set up an internal control framework, and ensure that it serves the purpose of safeguarding your assets from fraudsters, maintains the accuracy and integrity of accounting data, promotes operational efficiency, and ensures compliance with management directives. Some common internal control measures include;

  • Restricting access to inventory access and financial account data
  • Ensuring that there is a multi-person sign-off on check writing, expense reimbursements, and other crucial accounting, and payroll functions. 
  • Separate the functions of creating and maintaining a database.
  • Assign administrative access of intranets, email accounts, business data to different individuals 
Segregate duties
Segregation of duties otherwise known as separation of duties is a concept of having more than one person required to complete a task. In business, it serves two purposes. One is that it ensures oversight and reviews with an aim of catching errors, and two helps prevent fraud because it requires two people to collude to hide a transaction. It is simple, no employee should have end-to-end control over your company’s finances. Don’t have one person handling all your bookkeeping functions like paying invoices, receiving cash, managing and recording these functions to the accounting system. Learn to keep the handling of cash and accounting functions totally separate. Doing this makes it easy to detect cases of fraud in case it happens.

Know your numbers- Conduct Audits

If you do not take time to conduct regular audits, it is likely that your employees are stealing from you. It is essential that you review the financial statements of your company regularly. Monthly audits are good, however, if you can’t, the quarterly audits will suffice. Try to include occasional nonscheduled audits especially in critical business areas. Conducting financial audits helps you to detect fraud by watching out for unusual or unexpected changes.

Safeguard your data
Every business keeps sensitive data – whether about its customers, employees, or the company. These data must be safeguarded, given it is a loophole for fraudulent activities. Have a clear written data handling policy. Ensure that your policy spells out who has access to vital information, such as passwords, account numbers, databases, etc. To back this up, you can also use nondisclosure agreements and non-compete agreements for key employees. This process is key as it helps you to identify the victim in case of fraudulent activity. 

Cultivate a culture for integrity
With everything said and done, one sustainable way of preventing fraud is living your corporate culture. A positive work environment can prevent employee fraud and theft. Ensure that you have a clear organizational structure, written policies, and procedures. In your policies, clearly outline expectations related to employee conduct. When the policy is clear, everyone understands what is expected of them, and is also aware of the ramifications if they behave otherwise. Besides the policy, ensure that you have fair employment practices, offer good wages, and have an open line of communication. In essence, when your employees are happy, they will work for, and not against the business.

Wrapping up
From our discussion, it is quite evident that by taking a few simple steps to put your fraud prevention plan into action, you can undeniably protect your business. As you might know, employee and business fraud can result in huge financial loss, legal costs, and ruined reputation. These factors can even lead to a downfall in business! Luckily, you can mitigate unforeseen threats. You should also strive to establish a culture of integrity and zero tolerance for fraud.

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