Nobody expects employee fraud to happen in the business but it’s better to be safe than sorry. Here are some prevention strategies you can put in place to protect your business from employee fraud.
If suspicions are raised about an employee committing fraud, it’s better to be proactive early on than to deal with the consequences of theft.
While the cost of a fraud is the primary impact on small businesses, it can leave other less obvious effects on companies long after the act is committed. Staff morale, reputational damage and strained supplier and customer relationships are all possible consequences companies could face as a result of employee fraud.
So, it makes sense to protect your company against employee fraud with prevention strategies or risk the business facing a number of challenges.
What is Fraud?
According to the Australian Government Attorney-General’s Department, fraud is defined as ‘dishonestly obtaining a benefit or causing a loss by deception or other means’. While no one likes to imagine that their own staff would misuse or steal company funds, small business employers in Australia have good reason to be vigilant against employee fraud.
Between April and September 2015, there were 91 fraud cases brought before Australian courts, with a value of just over $128 million, according to KPMG’s Fraud Barometer. KPMG also found that maintaining extravagant lifestyles and gambling were two key drivers of fraud, regardless of gender.
Employees can also commit fraud against their employers for other reasons, including life events such as divorce or family illness that trigger financial and emotional stress.
Types of Fraud
From simple acts to more sophisticated methods, employee fraud can be committed across a broad scale.
Accounting body CPA Australia divides fraud into three areas:
- Asset misappropriation
- Fraudulent accounting and financial reporting
Pressures, opportunity and rationalisation are the three main factors that motivate fraudulent activity, according to CPA Australia, with opportunity being a key element all Australian businesses should seek to reduce.
Opportunity in this sense means the circumstances that let a staff member commit a fraud, such as weak internal control systems, such as a lack of supervision or management approvals.
Examples of opportunistic fraud include employees creating bogus suppliers and directing those supplier payments into their own bank accounts, obtaining kickbacks or bribes from suppliers and faking timesheets.
Meanwhile, employees can also create ‘ghost’ employees or not delete former staff records and have their salaries paid into their own accounts.
Employers should take proactive measures to reduce the risk of fraud and corruption ever happening in the first place.
Prevention of fraud through a solid set of internal controls is the best strategy, as staff will be aware of the systems in place to combat corruption and therefore be less likely to commit a fraud.
Employers should primarily lead by example and make it known that everyone in the business must adhere to the policies and procedures and be held accountable for their actions.
Key prevention strategies include:
- Fostering a positive work environment where employees feel valued
- Having a policy manual where control procedures are documented. All staff members should have access to the procedures and be trained in them
- Creating a code of conduct that makes it clear there is a zero tolerance of fraudulent activity
- Separating duties so no one person is responsible for a complete transaction from start to finish. If this is not possible in a small business, employees handling finance should be closely supervised.
Other methods to reduce fraud risk include:
- Screening potential employees
- Carrying out surprise audits
- Requiring cheques to have at least two signatures
- Being aware of staff having financial difficulties or, on the other hand, showing signs of a sudden lift in living standards.
If a fraud does occur in your business, stop it from continuing by reducing employee computer access, then work to collect the facts and discuss the issue with the employee. Lastly, a business can report the fraud to the police.
To prevent future fraud from occurring, look at hiring a fraud examiner who can implement the internal controls needed for the business.
Fraud can have a range of consequences on the success of your small business, including financial loss, reputational damage and staff and client relationship breakdowns. So, whether your business is just getting started or you are an established player, it is vital you have prevention strategies in place to combat the potential risk of employee fraud.