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How Businesses Can Avoid Internal Fraud

An employer never expects an employee he or she hires to one day bring down the company, but it happens all the time when an employee decides to commit fraud. Internal fraud is a huge issue that requires employers to react.

If you want to stop fraud in your business, then you need to act now. It starts by understanding how fraud can impact your company, and then it requires taking the proper steps to make sure no employee will ever have the chance to do anything fraudulent.

The Dangers of Fraud

If you have a small or medium-sized business, then you are most at risk for internal fraud. Companies of this size often have a sense of family where employees can easily get away with more nefarious activities because nobody expects it to happen.

While it is perfectly fine to be close with employees and encourage comradery, you still need to maintain professionalism. You need to understand that you can't always trust everyone, even if they seem to be a wonderful person. It is often those employees who everyone loves and thinks is the nicest person ever who are the ones that are stealing from you.

There are three general types of internal fraud:

  • Theft
  • Misappropriation of assets
  • Financial statement fraud

These activities could include stealing cash or property, making fake claims, getting kickbacks, or creating schemes to skim money from accounts. Fraud may also include larceny, fraudulent disbursements, embezzlement, and stealing customer lists or trade secrets.

Signs of a Bad Apple

SCORE suggests familiarizing yourself with the common signs that someone may be a risk to your business. Things to watch out for include:

  • Suddenly working late or overtime
  • Substance abuse
  • Financial troubles
  • Issues with changes to policies
  • Living above means
  • Gambling addictions
  • Side jobs similar to your business

Seeing multiple signals or noticing these behaviors as something new with an employee could point to something going on. Of course, you do want to do some investigation before assuming the person is involved with criminal actions. For example, if you start to notice someone working more overtime, then you want to see if there is a logical reason behind it. In many cases, there will be. So, avoid jumping to conclusions, but keep your eyes open so you don't miss obvious signs that you have a problem.

6 Steps To Take To Stop Fraud

While it may be tough to prevent all fraud from occurring, there are things you can do to minimize the possibility. Taking a proactive stance will allow you to stay on top of things, and should an employee decide to engage in criminal activities, you will have the ability to catch him or her before your business suffers too much of a loss.

1. Set Checks and Balances

You need to institute a system within your business where work runs through multiple employees. Leaving one employee to manage everything is a huge risk. You need checks and balances to spot issues. When one employee checks the work of another, you can more easily identify oddities and manage accounts better.

2. Make the Rules Clear

Being upfront with employees and letting them know you will not tolerate internal fraud can set the right environment in which nobody will even try to do something nefarious. Make the rules clear by providing employees with written policies for ethics and fraud. Also, make sure you outline what will happen if you discover any type of fraudulent activity.

Do not forget to set a good example and show from the top down how you follow the rules. If you relax the rules for even one person, it opens the door for others to follow suit. Then, all the rules become a moot point because employees see you don't take them seriously.

3. Make Employees Take Time Off

Enforce vacation and time-off policies. Letting employees overwork opens the door to opportunities to conceal wrongdoing. Also, when you give employees time off and make them take it, it can make it much easier to spot a problem.

4. Reduce Risks

You have many ways to reduce the risk of fraud in your business starting with surprise audits. Corporate investigations allow you to get a real look at what your employees do and make it simple to spot issues.

You should also limit access to credit cards and accounts so you can more easily monitor them. Control receipts for your business, and always check them for validity. Also, track your checks and watch for missing numbers. Keep good control over inventory as well.

5. Implement Training

Train your employees on fraud prevention and detection. When everyone knows what to watch for, it makes it easier to control the situation. Most people will not even try to do something if they know that the chances of getting caught are high. When you train your staff, it creates a group mentality that fraud is not acceptable, so they will be highly likely to let you know if something is amiss.

6. Follow Through

You have to be strong and firm when it comes to fraud, which means that if anyone comes to you with concerns, you investigate them fully. Always follow up because if you let reports go, that just tells your employees that you aren't serious about stopping the activities. It essentially gives those who are doing wrong the green light to keep doing it.

Also, you need to make it easy for people to make reports. Make sure that the system you use allows them to do so without everyone else knowing they did it. People often will not want the spotlight on them as the person who revealed what was going on, and if they don't feel they can make a report privately, they simply won't do it.

Keep Your Business Safe

It is fully in your hands to protect your company from internal fraud. All it takes it committing to it and making sure that you send the right messages to your employees. Create a work environment of zero tolerance, and you can stop fraud in its tracks.

Jeremy Biberdorf

Connect with me on social media: Twitter | Facebook | LinkedIn
June 23, 2020
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