As if small-business owners are not facing enough struggles, there is another rising threat: employee fraud. During periods of economic decline, employee fraud, ranging from petty theft to forgery, increases and is often unnoticed as losses are attributed to a decline in sales.
Most business owners believe it could never happen to them. They “know and trust” their staff, ignoring that a small workforce equals increased risk for fraud. When times become tough, employee layoffs increase and fewer employees means additional responsibilities for all personnel. With that, gaps in internal controls are created due to the pure lack of personnel or oversight.
There are fundamental elements owners can put into place to reduce the risk of fraud, no matter the economic climate.
When hiring a new employee, ask yourself, “Can I trust this person with my money and my reputation?” Perform thorough background and credit checks on candidates. A past history of theft has the potential to repeat, and a desperate financial situation may fuel the motivation to take advantage of weak controls over cash and other assets. In many businesses, there is an inverse relationship between senior management positions and the amount of time spent following the appropriate checks when hiring new personnel. Make the time to carefully evaluate candidates.
Communicate to your employees about fraud. Use a professional fraud examiner to educate yourself and your staff about what constitutes fraud and expectations regarding ethical behavior. According to the Association of Certified Fraud Examiners, 46 percent of fraudulent activities are detected through employee tips. No one knows the inter-workings of business better than employees performing the functions day to day. Hold regular meetings with staff to discuss any potential threat they may be aware of, and if necessary, employ a third party hotline employees can anonymously call to report any suspicious activity.
Finally, develop a corporate code of conduct. This should be a detailed policy demonstrating to your employees that your company takes the issue of ethics and dishonesty seriously. It should also provide definitions and explanations of what is considered dishonest behavior and what the consequences will be to any employee considering fraud. No threat is more pervasive than the threat of being caught. The code of conduct should be distributed to all personnel. Also, consider creating procedures to confirm employees have received and understand the document.
As a business owner, you can never fully prevent fraud. However, you can be less susceptible. Limit your risk by putting safeguards in place and regularly monitor them. You are the best advocate for reducing fraud in your business and taking time to implement basic steps may prove priceless in the end.
Kristin A. Bivona, CPA, Cr.FA of GellerRagans
Waterford Lakes resident