Protect Your Company and Customers against Employee Fraud

No business owner likes to think his or her personnel could be dishonest - until it's too late. Employee fraud not only drains hard-earned revenue; it also affects how your company is perceived by customers, suppliers, and vendors.

Here are some of the steps you can take to protect professional and personal assets from employee fraud.

Financial

• Sign all checks personally. Get rid of the "check stamp." If that sounds too time-consuming, require two signatures on checks over a pre-determined amount. That way you'll create a system of checks and balances to ensure no one person has the authority to make major purchases without authorization. Audit your checks on a regular basis to make sure no checks are missing.
• Keep checks and financial documents in a safe place. Restrict access only to those who truly require access.
• Eliminate petty cash. Set up accounts with vendors and suppliers. Use purchase orders and invoices.
• Set limits on purchase approval. Decide your "purchase pain" threshold, and limit purchases in excess of that amount to a select group of employees - or even to yourself.
• Require all purchases to be authorized by a select group of employees; do not grant blanket authority to all employees, even on a limited dollar-amount basis.
• Divide responsibilities. Never allow one employee to be responsible for all stages of a financial process chain. For example, have one employee create and make bank deposits, and have another employee reconcile bank statements. If you run a retail store, have a different employee reconcile cash registers at the end of the workday.
• Hand out paychecks personally. If you run a small business, you know all your employees. If your employees run in the hundreds, it could be easy for someone to create a "phantom" employee and pocket their "earnings." Handing out checks not only lets you keep track; it also lets you say "thank you" to your employees for their hard work.
• Keep original copies of all purchase orders and invoices. Have multiple people responsible for counting, ordering, and checking in inventory. Rotate duties. Create checks and balances.
• Have an outside accountant review your books on a regular basis. A fresh set of eyes can catch discrepancies or problems you might otherwise miss. Audit payroll records on a regular basis. Match time cards, work hours, etc., with payroll records in case there are "phantom" employees or overstated work hours.
• Know your vendors. Check in with them regularly. Stay in touch with what supplies and services your company purchases. Make it easy for vendors to let you know if they think fraudulent activity is taking place.
• Perform credit and reference checks on all businesses to which you may extend credit. Credit and reference checks are your best defense against fraud - and against offering credit to companies or individuals who are not in a position to make good on the debt.
• Don't give one person complete control of your company's finances. We covered this topic already, but it bears repeating. Don't create temptation. Divide responsibilities and conquer potential fraud.
• Run regular business credit checks. Identify misuse of company accounts or accounts created without your knowledge.
• Shred sensitive information. Retail stores and restaurants take in massive amounts of customer information including credit card numbers. Shred all documents containing personal information including unused or unneeded credit card charge slips.
• Immediately investigate if you suspect fraud.

Property and Data

• Lock all doors and restrict access to specific areas. Office employees do not need access to spare parts; shop-floor employees do not need access to financial documents.
• Maintain an up-to-date list of equipment and supplies. Know what your business owns and make sure it stays where it belongs.
• Assign keys and electronic keys. Check periodically to make sure assigned keys have not been lost or stolen.
• Password-protect all computers and programs. Use strong passwords, and change those passwords frequently.
• Perform regular data backups.
• Keep all sensitive information in locked drawers and cabinets. And limit access to those files on a "need to have access" basis.
• Reclaim all keys and badges when employees are terminated.

Identity

• Keep customer files in restricted areas. Never let employees take files containing employee or customer information from those areas (especially to their homes). While working from home may make sense, segregate sensitive information from other data or information that can be safely used outside the office.
• Keep company files in restricted areas. Pay special attention to employee files containing personal information; your files likely contain addresses, Social Security numbers, bank-account numbers --data that can be used to steal another person's identity.
• Never put Social Security numbers on employee paychecks. Better yet, consider direct deposit.
• Dispose of sensitive data properly. Shred paper files and format hard drives. Create policies and procedures for properly disposing of any physical or electronic data and make sure those procedures are consistently followed.

Once you put safeguards in place, create formal policies detailing the repercussions and steps that will be taken if an employee is found or suspected of engaging in fraudulent activity. Make sure all employees are trained in your policies and fully understand potential disciplinary actions as well as the civil and criminal penalties they could face. (While that may feel like an awkward conversation to have with employees, don't worry; honest employees won't be offended while potentially dishonest employees may think twice.)

No matter how hard you try, it can be difficult to eliminate all employee fraud. Consider adding employee theft and fraud coverage to your business insurance policy; that way if the worst does happen you may at least be able to minimize the financial repercussions.