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Operational Risks

Preventing Employee Theft & Fraud

Protect Your Business from Internal Threats

All businesses are exposed to the risk of employee theft and fraud. Criminals don’t care if their victim is a mom-and-pop store or multinational corporation. A thorough understanding of vulnerabilities, paired with the ability to spot red flags, can help businesses mitigate the risk of embezzlement and other white-collar crimes.

How Employees Steal

There are many schemes employees use to defraud their employers. Most fall under the category of embezzlement, where someone misappropriates funds or property for their own financial benefit. Among the most common types of embezzlement are:

  • Asset Theft: An employee steals money or goods that rightfully belong to the business. This includes crimes such as skimming from cash registers, transferring company funds to a personal account, stealing from inventory, and check fraud.
  • Vendor Fraud: An employee creates a fictitious invoice or inflates legitimate charges, then transfers company payments to an account under his control.
  • False Reimbursements: Employees disguise personal spending as a business expense, then request reimbursement. The employee might also exaggerate a reasonable business expense and pocket the difference.
  • Payroll Fraud: The perpetrator issues checks to people who don’t work for the company, then cashes them herself.

Sadly, this is an incomplete list, as criminals are adept are devising complex embezzlement schemes. However, it does illustrate the variety of threats businesses face.

Who Steals From Their Employer?

Any employee can steal from a business. Clerks and managers have easy access to cash, while corporate accountants understand how to move money without attracting attention.

According to a 2017 report from Hiscox, most perpetrators work alone. Presumably, criminals want to maintain a low profile and keep the ill-gotten gains for themselves.

Unfortunately, many businesses have been victimized by trusted employees and people in leadership positions. Business fraud can go undetected for years because of implicit trust, which makes the consequences of the theft that much more painful.

Preventing Employee Theft

While every business is vulnerable to employee theft, different industries are faced with different threats. Shoplifting is a major concern for retailers, but not financial services companies. Even so, risk management programs will share some characteristics.

Pre-employment background checks are a standard step in most businesses’ hiring processes. However, a clean record provides no guarantee about future behavior. For this reason, additional risk management procedures should be put into place.

Here are several tips for protecting a business from embezzlement and fraud:

  1. Divide payroll and billing responsibilities among multiple employees. If a single person can approve and pay invoices, they’re well-positioned to cover their tracks when stealing funds. Requiring several people to process payments or paychecks makes it more difficult to keep such a scheme under wraps.
  2. Perform regular audits. Asking a third party to review a business’s finances can bring theft to light.
  3. Establish a reporting system for employees to share anonymous tips. Co-workers are sometimes the first to spot suspicious behavior or financial inconsistencies, but they aren’t always eager to speak up. Creating a phone line or comment box for anonymous tips may help uncover a scheme.
  4. Monitor your business credit. A decline in business credit scores and ratings can accompany instances of business fraud. If someone embezzles funds meant for a vendor, that company may report the debt to a business credit bureau, damaging your credibility. Such a change could prompt a business to take a deeper look at its payment practices.
  5. Be aware of your blind spots. Company founders and long-time employees can and do commit fraud. Risk management policies must apply to everyone, not just low-level staff.

How to Spot Warning Signs

Accusing an employee of theft is no small matter, and management shouldn’t rely solely on observations and instinct when conducting an investigation. With that in mind, there are several warning signs that may accompany employee fraud:

  1. Financial stress. A person under financial pressure may be tempted to steal from their employer. Major challenges, including a divorce or sickness in the family, can cause otherwise honest people to make poor choices.
  2. Living beyond one’s means. If an employee begins making large purchases that are out of step with their earnings, it may be a sign of embezzlement.
  3. Persistent overperformance. Gaining the respect and trust of management and co-workers can shield a fraudster from suspicion.

Employee theft can do serious damage to a business’s financial health and reputation. Managing risk is an essential part of protecting a company from those who would seek to enrich themselves at its expense.

Learn more about how Dun & Bradstreet can help you manage business credit on our Products page.

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