Most business managers and owners are well aware of the threat of loss from outsiders, and use a variety of methods to reduce this risk. From locks on the doors, to security guards and dogs, to complex electronic burglar alarm systems, many preventative steps are taken.
However, it is often the case that less attention is dedicated to reducing the risk of theft by an insider. No one wants to believe that an employee will purposely defraud the company of money. Most people want to trust their employees, and rightly so. But it only takes one bad apple to do significant damage. Depending on the person's position within the company, and the length of time the theft continues, substantial losses can result. Business owners often have a tendency to believe “it can't happen here.” Unfortunately, employee fraud is quite common. Furthermore, no risk reduction measures can be guaranteed to keep it from ever happening or detect every instance.
Having said that, loss control experts recommend two general approaches to reducing vulnerability to theft by insiders: measures to decrease the probability that employees will commit the crime, and measures to increase the perceived probability of discovery and punishment. Below are seven tips to help with both approaches:
1. Institute an anti-fraud policy. Many employers wrongly assume they don't need to discuss insider theft, since their employees know it is wrong. But experts say a strong, written anti-fraud policy, published in the employee handbook and/or posted on employee bulletin boards, helps prevent insider theft. The written policy reinforces the employer's intent to maintain an honest, ethical environment, as opposed to one where it is regarded as common practice to steal from the employer.
2. Ask employees to report suspected fraud, and provide guidelines for reporting fraud. Employees need to understand how to report any suspicion of fraud or theft. Honest employees will usually report fraud when there is a good policy for doing so. They are more likely to say nothing, if they are not sure how to report the suspicious behavior of a co-worker.
3. Maintain a business climate of loyalty and trust. Expectations influence behavior. When you expect employees to steal, some are more likely to do so, reasoning that there is no point in behaving honestly if you are already suspected of being dishonest. Maintaining an atmosphere in which employees feel trusted and valued and are rewarded for loyalty helps prevent insider theft.
4. Encourage ethical business practices. The typical employee thief is often a first-time offender who rationalizes his or her behavior to avoid having to face up to their criminality. Employees who have a weak moral character are more likely to act on it in an environment where they see the business engaging in unethical practices. When the company promotes and rewards ethical business practices, the risk of insider theft goes down.
5. Compartmentalize job functions. When the same person both approves and pays invoices, it is especially easy for a dishonest employee to submit bogus invoices and then pay them. Compartmentalizing duties helps to prevent this type of scheme.
6. Ask your accountants to look for red flags that could indicate fraud. Among the methods accountants often recommend are accounting controls, built-in detection mechanisms, and reconciliation of records. Businesses increase the probability of discovery with frequent audits that include steps to uncover fraud. Make sure that accountants understand that you view the discovery of insider theft as an aspect of their duties and services. Utilize your accountants to survey either all employees or randomly chosen employees from time to time, asking whether they are aware of any misappropriation of company money, property, or resources.
7. Look into any tips about employee fraud. Many dishonest employees are first brought to their employer's attention as a result of a tip from an unhappy spouse or significant other. These tips should be investigated objectively. Sometimes employers ignore such tips, because they trust the employee in question, only to find out later that the tip was accurate. In such cases, the amount of the theft could have been lessened by taking the initial tip seriously.
In summary, to reduce the risk of insider theft, the employer's position should be one of trusting employees in general not to steal, while at the same time being proactive about measures to help keep workers honest. Most employees will never engage in schemes to defraud, but unfortunately, there are always some who will. The dishonest employees are often the very people the employer would be least likely to suspect.