Prevent Employee Fraud With Pro-active Approach

December 7th, 2010 by

What you don’t know about employee fraud is hurting your business.  Consider the Honda dealership in Ohio that lost between $500,000 and $1 million over the course of four years due to theft by a long term employee or the two dealerships in Lousiana that both hired the same controller- she stole over $100,00 from each of them.   While trust is a crucial element in the employment relationship it would be wise to put in place other measures to ensure that employees are not defrauding the company.  The Association of Certified Fraud Examiners (ACFE) reports in the 2010 Global Fraud Study that the median loss caused by occupational fraud was $160,000, with nearly one-quarter of the frauds involving losses of at least $1 million.  The criminal activities lasted an average of 18 months before even being detected.  The study also found that businesses with fewer than 100 employees suffered the greatest percentage of employee theft of all the companies studied.  Smaller employers are excellent targets for employee fraud because they tend to place a greater value on “personal relationships” and have less anti-theft controls in places.

Employees commit fraud because they can, because they can justify the fraud or theft and when they have the means to commit the fraud.  Strong internal controls and good accounting practices along with a positive workplace culture will go a long way to reducing fraud.

Simple steps that HR can implement to reduce or eliminate employee fraud include:

  • Establish and enforce policies on employee ethics, fraud prevention (internal controls) and compliance with state and federal laws regarding Red Flags, Customer Information Security and 8300 Cash Handling
  • Perform background checks including reference checks and county criminal history checks before you hire and again when you offer a promotion or change of duties
  • Provide training on fraud prevention to all managers and employees
  • Establish a “hotline” or other method for employees to report fraud
  • Create a positive workplace culture-treat employees fairly in regards to promotion and discipline
  • Prosecute when you discover employee fraud – don’t just terminate the employee and allow the problem to continue at the next employer

Consider hiring a forensic accounting firm and have them perform the following activities at least on an annual basis:

  • Preparing bank account reconciliation on a surprise basis
  • Reviewing cancelled checks
  • Performing physical inventories
  • Analyzing parts inventory activity

Additional information and excellent resources on workplace fraud prevention can be found at

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2 Responses to “Prevent Employee Fraud With Pro-active Approach”

  1. Joe D. says:

    Thanks for the insight. I’ve been with a small business in Missouri for quite some time and this report really makes you think about your current internal controls (or lack thereof). It’s difficult when you don’t have the resources to maintain quality control, but I’ve been reading up on ideas. I found a great blog post by a CPA firm here in MO that has addition information, so I figured I’d share. Thanks for the help!

  2. Thanks for sharing the additional information. Employee fraud is a huge issue for all organizations but especially for small businesses.

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