A philosophy for reducing employee fraud for SMEs

Planning and diligence are crucial to reducing the risk of employee fraud.

Employee fraud happens every day, search your favourite news site for fraud and a string of recent stories will be returned. Companies lose five per cent of annual revenues every year. SME companies were disproportionately represented in the 2016 report at 30 per cent of the cases and a median fraud loss of $150,000 with no recovery in 58 per cent of the cases.

Organisations that had anti-fraud controls in place losses were 14 to 54 per cent lower and frauds were detected 33 to 50 percent more quickly.

Focus on the following areas to reduce your risk of employee fraud:

Know your employees

Personal circumstances often drive an employee to perpetrate fraud. Personal issues such as lack of job promotion, separation from their partner, family health issues, addictions like gambling, financial difficulties or living beyond their means.2.

Educate employees about fraud and the risk to the business

This highlights the importance of the subject area to employees; let them know they can contact the company owner at any time. This could be an anonymous whistle-blower mechanism; this is the most frequent source of identifying fraud events. Implement a fraud policy outlining the implications to offenders like you will prosecute. Encourage employees to suggest better company processes.

Screen employees during hiring process

Statistics show screening can pick up prior employment fraud activity in up to 18 per cent of people. You do not want to risk letting this segment into your company. Run the key checks for criminal records, credit issues and prior employer references including questions around honesty.

Establish robust Internal controls

It is always better to prevent the fraud than to detect it after the money is gone. A key internal control is segregation of duties, where money or other assets are involved. For smaller companies, it is often difficult to properly segregate the duties for good internal control.

Require that all employees take vacations

Make them take holidays without access to your systems; particularly those in accounting, operations, procurement, warehousing or customer service. Make sure someone else does their work while they are away, otherwise, it defeats the purpose of making them take a break.

Ensure your data has integrity

Ensure all company customers and suppliers are legitimate. Verify against government company record offices; in Australia via ASIC, in New Zealand via the Companies office.

Ensure all customers and suppliers have a physical address and phone number stored in your accounting system. You can validate these with Google maps. Make sure you have your employees home address, personal email and home phone number stored in the accounting system, validate every six months. Check to make sure your employees and suppliers do not have the same address.

Process all payments through the accounting system

If you do not generate your payments from your accounting system you cannot report on where that payment actually went. Change your processes immediately if you are not doing this. Unfortunately, most of the smaller accounting systems do not track this well.

Review monthly financials

Always look to understand the detail of your financials looking for irregularities. Do not be complacent or brush over any irregularities without fully understanding the reasons given.

Implement a fraud-detection monitoring solution

Continual monitoring of accounting system data helps in many ways. It creates a perception of detection for staff, which is a huge deterrent for fraud. This continual focus is the only way to achieve the integrity of your data. A reporting tool is the only way to track changes in most small accounting packages which have very limited audit trail functionality.

Brett Wilgar, CEO, Watchful Eye Software