How to Protect Your Business From Employee Fraud

There are few business problems as difficult to address as fraud. Emotions can run high as any consideration of the matter immediately casts doubt on the trustworthiness of team members and can create an environment of secrecy and suspicion.

The first thing to understand is that everyone, including any individual who may be skimming company funds, is a victim of the system that exists within your company. Fraud exists when incentive, opportunity and rationalization all convene. By removing any of those pieces, you can reduce the likelihood that a team member would ever go to such an extreme.

What is Fraud Costing Me?

The median loss for all fraud cases as reported by the Association of Certified Fraud Examiners in 2016 was $150,000. A 2015 report by Retail Risk found that employee theft was the largest contributor to shrinkage, which collectively accounted for $60 billion in losses for U.S. retailers. Expense reimbursements, skimming and cash-on-hand fraud collectively account for 37 percent of losses from fraud.

What is the Fraud Triangle?

As a leader, you understand that nothing “just happens.” There are always motivating factors and an environment that facilitates any activity. When we're talking about the environment for fraud, we're looking for opportunity, incentive and attitude.

• Opportunity: It has to be possible to steal from the company, otherwise no one ever would. Most common in the retail industry are falsified expense reports, mishandling of petty cash and the unlicensed use of company credit cards.
• Incentive: It might be true that everyone would like to earn more money, but that in itself is usually not enough to drive someone to steal. Consider whether your team members may be in serious financial stress (medical bills, gambling debts, etc.), or angry at the company or employer.
• Attitude: This final element is the hardest to recognize but is imperative to actually defrauding the company. There must be a rationalization for undertaking the crime. An employee may justify their theft because they think no one will notice, they think they deserve the money or they intend to pay it back later.

How to Protect Your Business

While employees with privileged access to various aspects of your business will always have the opportunity to embezzle funds, opportunity isn't the only piece of the fraud puzzle. Consider some of these options for protecting your business:

• Technology: Cutting-edge technologies allow businesses to protect themselves against threats of many kinds by creating checks and balances within the organization to approve expenses, monitor spending, respond to potential breaches, actively administer company credit cards and better track who has access to funds.
• Policies: Reviewing company policies in high-risk aspects of the business like accounting and reimbursements will turn up opportunities to increase security. Look for ways to take out elements of the "Fraud Triangle." Look at your company’s vacation policy, process for reimbursing expenses and make an effort to better understand team members’ personal lives.
• Response: It should go without saying, but acquiring fraud insurance is a must. The cost-benefit analysis is clear — it's cheaper to be insured against the threat than it is to experience significant losses from embezzlement. Most leading business insurance plans offer fraud protection at reasonable rates.

Employee fraud is a problem that thrives in the shadows, benefiting from the taboo nature of the subject. As the leader of your company, shine a light on this issue, change your company’s culture and seal whatever cracks may exist. It's hard to have peace of mind as an executive, particularly in the retail sector, but fraud should not be one of your headaches.

Farhan Ahmad is a serial entrepreneur as well as founder and CEO of Bento for Business, which provides financial solutions that fit small businesses.