Protect Your Business From Employee Fraud

Apr 07, 2010

I was reading the Denver Post business news this afternoon and came across an article written by Miles Moffeit and Aldo Svaldi about the recent collapse of New Frontier Bank in Greeley, Colorado -  According to the article, this $1 billion bank failure was the costliest in Colorado history.

Among the factors leading up to the failure was a case of employee fraud.  One of the bank’s highest producing loan officers had stolen up to $75,000 out of multiple customer accounts.

Unfortunately, employee fraud is more common than you might think and the results for a small business can be devastating.  According to the 2008 Report to the Nation on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners reported that “the median loss suffered by organizations with fewer than 100 employees was $200,000.  This was higher than the median loss in any other category, including the largest organizations.”

The most common schemes included check tampering and fraudulent billing, and the bulk of the frauds were committed either by the accounting department personnel (28%) or upper management (18%).

If you subscribe to the 10-10-80 rule, then you believe that 10% of your employee base would never steal from you, an equal group of 10% is actively searching for a way to rob you blind, and the 80% in the middle might be swayed in either direction, depending on the circumstances.

With this in mind, there are some basic steps you can take to reduce your risk:

Hire the right employees: Complete criminal background checks on candidates, check references, verify education and certification claims, and consider drug screening.  (Make sure you have the written consent of the candidate.)

Deter Fraud: Establish adequate internal controls and segregation of duties.  It’s never a good idea to put too many financial responsibilities in the hands of one individual.  Review the accounting records regularly and require annual vacations for accounting staff.  Conduct audits in high risk areas such as Payroll and Purchasing.  Investigate customer complaints personally.

Pay Attention: There are usually “red flags” to help identify higher risk employees.  An employee may suddenly appear to be living beyond their salary.  They may have a loved one who is ill.  They may be going through divorce.  Maybe you were forced to reduce salary as a result of the recession and you have an employee who feels “entitled” to something more than you are able to pay them.  Know your employees and understand influencing factors in their lives.

And finally, review your insurance policies to ensure that you have adequate protection in the event that you are a victim of employee fraud.



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