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Employee fraud: are you at risk?

Employee FraudDodgy invoices. Forging bank details. Bill tampering. Just to name a few. Employee fraud is a real risk for entrepreneurs of fewer than 100 employees.

In fact, according to the Association of Certified Fraud Examiners 30% of fraud cases take place in small businesses.  That could be your business.

Several years ago I worked for an employer and uncovered $35k worth of employee fraud that the business owner had no idea about.  Yep, he had no freaking idea that his ex bookkeeper had paid her family in Fiji the tidy sum of $35k and called it “superannuation” in his accounting system.

“One begs the question – how on earth did he not know? And how on earth did she get away with it?  Well she didn’t get away with it once I came along and actually reconciled her suppliers, bank accounts and invoices.”

So what are the most common signs of fraudulent activity that you can identify before an unscrupulous employee destroys your business?

Identifying high risk employees

When an employee has something to hide, their conduct may become suspicious; they may act closed off, secretive and defensive.

A common clue is a worker who won’t take time off for any kind of holiday and don’t wish to delegate any work (because someone may take over their duties and discover the fraud). Others will try to cover up their improved financial status – a new car or home, for instance – with tales of a lottery win or inheritance.

In addition to employees acting suspiciously, high risk employees might also include those:

  • struggling with debt
  • dealing with mounting bills because of unfortunate circumstances (e.g. divorce, a family member’s poor health)
  • involved in risky financial ventures (e.g. gambling, investments)

If an employee has a motive for fraudulent activity at work, think of the following behaviors as red flags.

Access and opportunity

Unsurprisingly, the highest risk employees for fraud have trusted roles in financial services: AP, AR, payroll and banking.

In order to commit fraud, an employee must have both access and opportunity – that is, access to funds, banking records, and accounting data. The ideal situation is someone entrusted with performing multiple roles and there is no segregation of duties.  So they can enter a bill, create a payrun and also go into the banking system and make those payments without another person involved in any of those transactions.

Unmanaged control

Access is just one part of the equation when it comes to employee fraud. Also keep a watchful eye on employees who exert control over certain aspects of their job.

For instance the may insist on:

  • working unnecessarily long hours
  • working outside of regular business hours
  • performing specific job duties and refusing to share certain tasks
  • only dealing with a specific supplier or vendor*

* A common employee scam known as “purchasing fraud” occurs when a supplier or vendor inflates an invoice amount, the employee makes the payment, and both parties split the difference.

Red flag scenarios

Monitor your financial records closely, and investigate more closely if you come across the following discrepancies:

  • Mismatched payees: the name on a bank account doesn’t match the name entered in the system
  • Identical payments:  two payments have cleared in your bank feed for the same amount to different vendors in the same date range
  • Questionable companies: a supplier or vendor with unprofessional invoices (i.e. obvious errors, a missing or incorrect address, home address, and/or non-existent web presence)

Now that you know how to spot the most common warning signs for employee fraud, it’s important your management team take steps to combat it. If your management team is just you, that’s fine, pull up your pants and wear the manager role with intent.  Your business cash flow depends on it.

Employee fraud is real.  Watch for suspicious behaviour, segregate financial roles so no one has unlimited access, control, or opportunity – and ensure your bookkeeping is always up to date so any “red flag” scenarios can be dealt with promptly.