A Sign of the Times: Take Steps to Reduce Employee Fraud
By James E. Merklin, CPA, CFF, CFE, Partner
Whether they realize it or not, many small business owners face the very real risk of internal fraud and embezzlement. Unfortunately, this risk may be magnified during times of economic uncertainty — when employees may be facing extreme financial pressures.
In fact, more than half (55 percent) of the Certified Fraud Examiners surveyed in a report published by the Association of Certified Fraud Examiners (ACFE) last year said they believe the level of fraud slightly or significantly increased in the prior year.
According to the ACFE, asset misappropriation is by far the largest type of internal fraud committed within small businesses, occurring in nearly nine out of every 10 fraud cases. There are two primary fraud schemes involving payment receipts:
The best way to guard against these schemes is to segregate financial duties. For example, different employees should receive customer payments, fill out deposit slips, make deposits, enter them in the ledger, and reconcile the bank statement. If this isn’t practical for a very small business, the owner should personally oversee these functions.
Cash Disbursement Fraud
There are a number of common schemes involving cash disbursements:
The best defense is simply diligent oversight of all of the company’s financial transactions. If your company is too large for this, at least perform periodic spot checks in each of these areas so that employees are aware that you (or another member of your management team) is watching. This will go a long way toward making employees think twice before stealing from you.
Whether they realize it or not, many small business owners face the very real risk of internal fraud and embezzlement. Unfortunately, this risk may be magnified during times of economic uncertainty — when employees may be facing extreme financial pressures.
In fact, more than half (55 percent) of the Certified Fraud Examiners surveyed in a report published by the Association of Certified Fraud Examiners (ACFE) last year said they believe the level of fraud slightly or significantly increased in the prior year.
According to the ACFE, asset misappropriation is by far the largest type of internal fraud committed within small businesses, occurring in nearly nine out of every 10 fraud cases. There are two primary fraud schemes involving payment receipts:
- Skimming – Cash is stolen before it is recorded in the books. For example, an embezzler could accept payment from a customer and simply pocket the cash and not record the sale.
- Cash larceny – Cash receipts are stolen after they’ve been recorded. For example, an embezzler could steal cash and checks from daily receipts before they are deposited in the bank.
The best way to guard against these schemes is to segregate financial duties. For example, different employees should receive customer payments, fill out deposit slips, make deposits, enter them in the ledger, and reconcile the bank statement. If this isn’t practical for a very small business, the owner should personally oversee these functions.
Cash Disbursement Fraud
There are a number of common schemes involving cash disbursements:
- Billing schemes occur when an employee submits invoices to the employer for fictitious goods or services, or inflated invoices for more than the actual amount. A common scam is to create a shell company and bill for nonexistent services.
- Check tampering occurs when an employee steals, forges or alters a company check and makes it out to him or herself, or steals a check the company has issued to a legitimate payee and tries to cash or deposit it.
- Fictitious expense reimbursements occur when an employee makes a reimbursement claim for fictitious or inflated business expenses.
- Payroll schemes occur when an employee makes false claims of compensation and attempts to receive payment for work not actually done or overtime not worked. Adding ghost employees to the payroll is another example.
- Cash register theft occurs when an employee makes false cash register entries (like voiding a sale) to conceal the removal of cash from the register.
The best defense is simply diligent oversight of all of the company’s financial transactions. If your company is too large for this, at least perform periodic spot checks in each of these areas so that employees are aware that you (or another member of your management team) is watching. This will go a long way toward making employees think twice before stealing from you.
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