Monday, July 29, 2013

How to prevent employee embezzlement

According to the US Chamber of Commerce, “One out of every three business failures are the direct result of employee theft.”  In addition, it is estimated that the “typical” organization loses 5% of its annual revenue to fraud. It usually takes over 18 months for a fraud scheme to be detected, if then.  Much has been written about the “Fraud Triangle.” This is simply the fact that fraud in a business is most likely to occur when the following 3 situations exist:
  1. Incentive – “I need money to pay the bills”
  2. Opportunity – “I can work around the controls…I can do this and hide that
  3. Rationalization – “I deserve it because I work all these hours….I’ll pay it back”            

 What are the warning signs that something may be amiss?
     Employees that:
  1. Overspend in relation to their salary
  2. Insist on doing certain duties that involve access to assets
  3. Do not take vacations

     Other signs:
  1. Missing documents
  2. Gaps in accounting records
  3. Un-reconciled variances
  4. Late notices from vendors
  5. Customer complaints about incorrect posting of payments
  6. Unusual patterns in bank reconciliations

So, what should we do about it? Here are some basic tips to help prevent fraud in the workplace:
  1. Screen potential employees (perform background checks, avoid nepotism, check out references, etc.)
  2. Be sure employees take appropriate vacations and someone else performs any critical duties in their absence
  3. Rotate jobs, particularly financial duties, among employees
  4. Have bank statements delivered directly to a responsible person unopened for their review
  5. Review the work performed
  6. Purchase adequate insurance
  7. Establish a fraud policy – let employees know fraudulent activity will be prosecuted

Attempts at employee fraud and theft will continue to occur in the workplace, especially in difficult economic times. However, with attention to details and basic control processes, owners and management can minimize this risk. Please contact us if we can assist in helping you formulate fraud prevention plans.

Jay Pease - Audit Partner