One of the many responsibilities of a business owner is that of detecting fraud and embezzlement. Most cases of theft on this level are carried out by an employee or a trusted business insider, such as an accountant. The ripple effects of a major theft incident can create serious complications that can linger on for many years, and in some extreme cases, it can even cause a business to completely shut down. Fortunately, there are several methods that business owners and high-level managers alike can utilize to successfully detect fraud and embezzlement before it’s too late.
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Financial Crimes Are Very Common
Take a quick scan through the news and you are bound to come across some newsworthy financial crimes. However, it’s not just the big-name corporations who suffer from them. According to a recent Thomas Reuters report in 2018, almost 50% of companies have been the victims of financial crimes. This alarming statistic alone highlights the importance of being proactive against fraud and embezzlement within your own organization.
What is Business Fraud?
The term “business fraud” is fairly broad in that it covers a lot of different types of crimes. As a more specific definition, the FBI defines business fraud as any dishonest or illegal activities perpetrated by individuals or companies in order to provide an advantageous financial outcome to those persons or establishments.
What is Embezzlement?
Embezzlement is a type of business fraud that involves theft or malfeasance by employees or other trusted members related to a business. Most commonly, embezzlement takes place when an employee steals money for personal gain. This kind of theft usually takes place within financial departments where there is heavy cash flow going in and out of the company.
Keep Track of Your Employees
As a proactive approach to preventing fraud, business owners should keep a close eye on the behaviors of their employees. There are several tell-tale signs that an employee is committing fraud, or may do so in the future. These behaviors can be broken down to how employees act both inside and outside the office.
Employee Behavioral Signs of Fraud INSIDE the Office
- Close relationship with vendors. It’s not to say that employees shouldn’t have good relationships with their vendors, but if the vendor is bending rules and making regular exceptions for the employee, this is an example of a major warning sign of fraud.
- Trust issues. If you notice that an employee doesn’t trust his or her co-workers to get involved in certain tasks, he or she could be hiding something illegal — especially within financial departments.
- Control problems. This example ties in with the above-mentioned trust issues. If you notice that an employee is always fighting to maintain and gain control of certain responsibilities, this could be a sign that he or she is scheming a plan to commit fraud.
- The need to work overtime. If you notice an employee working overtime even when it’s not needed, this could be a sign that something illegal is taking place outside of normal working hours.
Employee Behavioral Signs of Fraud OUTSIDE the Office
- Work is being done from home. If an employee often takes home work to be completed outside the office, it’s a possibility that fraud could be committed.
- Extravagant purchases. New cars and expensive trips are a couple examples of how an employee could be spending embezzled money.
- Special employee relationships that are developed outside work. Keep a lookout for employees who plan outside meetings with specific employees. While it’s certainly possible that these could be casual get-to-togethers, it’s still a behavior to note, especially if any other potential signs of fraud have occurred.
Follow Up With Your Vendors
Embezzlement through vendor relationships is one of the most common types of business crimes. To avoid this kind of fraud, check in with your vendors. Make sure all of your accounts are up-to-date in regards to payments. A large number of late payments is a major warning sign of potential embezzlement.
Check Your Records
Orderly record-keeping is one of the most essential components to avoiding fraud. Checks and balances should be in place across all records; this includes cross-departmental communications, with monitoring systems in place for all critical areas to keep a close eye on employees and vendors. If missing receipts and corrupted files are a common occurrence in your accounting department, there’s a chance that embezzlement could be taking place.
Deposit Daily and Reconcile Monthly
For those businesses that handle cash-in-hand each day, it is crucial to carry out daily deposits. If you leave cash sitting in your place of business for an extended period of time, you only risk the possibility of it being stolen at some time or another. In addition to daily deposits, reconciling your monthly bank statement will help you spot any possible irregularities before they add up to something big.
Use Outside Advisors
Outside financial advisors, such as a certified accountant, will analyze your business for potential instances of fraud. Most importantly, they will do so without alerting any suspected employees. Embezzlers are always on the lookout for changes to see if they have been caught. Professional accounting services will use their knowledge and experience to navigate the situation without raising any alarms across your organization.
How to Prevent Fraud and Embezzlement
- Limit overtime, especially to employees who work in the financial/accounting departments.
- Do not allow employees to take their work home.
- Monitor the relationships between employees and your vendors.
- Implement cross-training amongst employees. In other words, do not allow one person to be solely responsible for certain tasks at all times.
- Implement monitoring systems to ensure that your record-keeping methods are flawless.
- Deposit your cash revenue on a daily basis.
- Check your monthly statements in an effort to catch potential problems before they get out of control.
- Check all travel expenses to make sure employees aren’t spending on non-work related items.
- Update your employee handbook to communicate your message about employee honesty.
- Prosecute those who get caught (being lenient will only encourage others to steal).
- Hire an outside advisor to properly analyze and search out potential fraud cases.
Prevent Financial Crimes by Hiring Us as Your Business’s Accountants
It’s undeniable that fraud and embezzlement theft can cause serious damage to your business. Considering just how frequently these financial crimes are committed, it’s essential for your company to have a preventative plan in place. Now that you have an idea of some of the tactics that can be used to detect and prevent fraud and embezzlement in your business, it’s time to put them in place. Contact us today for professional assistance with building and implementing a reliable fraud detection and prevention plan for your business.