Avoiding Employee Fraud
As a preface, Christine, my wife who sense-checks and edits my articles, told me this one is “confronting”. So, to clarify, by far, the majority of our employees are honest and reliable. The article's purpose is not to scaremonger but to remind business owners that there are steps we can take to minimise the fraudulent activities of any bad actor we might inadvertently employ. On to the article…
It is a sad fact that employees, sometimes trusted employees and even family members, can sometimes exploit weak business systems to defraud their employer. We are deceiving ourselves if we think our business would be immune to employee dishonesty.
The Association of Certified Fraud Examiners (ACFE) estimates that fraud typically occurs within a business for 12 to 18 months before being detected. Many instances of fraud continue for much longer or are never uncovered.
The ACFE noted that businesses with fewer than 100 employees experience 28% higher fraud rates than larger companies, due to limited resources for fraud prevention. More than half of fraud occurs due to a lack of, or overriding of, internal controls.
To read more (frightening) information about fraud, you can download the 2024 ACFE Occupational Fraud Report here: click here
Within the flooring industry, many businesses have been victims of employee fraud. Almost invariably at the hands of longstanding and trusted employees.
Unfortunately, the relative complexity of a flooring transaction creates more opportunities for fraud, and few flooring businesses have the robust systems and processes needed to minimise the likelihood of fraud and to catch it early.
Tightening and maintaining our processes to minimise fraud is, unfortunately, one of those business activities that should have a high priority, but it gets relegated in favour of the daily demands of running a business.
Opportunity for fraud is exacerbated by off-the-shelf financial solutions that allow changes to be made to financial records with inadequate checks and balances. It is made worse by accountants who journal discrepancies when the amounts are below what they consider to be “material”. Most often, this means they would have to charge more to find the source of the discrepancy than the actual value of the discrepancy.
It's worth noting that any fraud that might occur in our businesses is not necessarily large-scale. Dishonest employees usually start with small irregular amounts, which grow as they feel they are getting away with it. Usually, it’s sufficient money to be significant to them, but not so much that it stands out immediately to us. When dishonest employees are caught, it is usually found that they have been stealing relatively small amounts over a long period, resulting in a significant cumulative loss.
Protecting our business from fraud is a big subject. Where do we start?
Establish business processes as if each position in the business were to be staffed by people you don’t know. Your trust in your existing staff might be justified, but your business processes should not be based on them.
Don’t put temptation in the way of your staff. Within reason, take preventive steps so staff don’t see an opportunity to steal.
As far as possible, separate office roles. For example, the person who inputs invoices to accounts payable should not be the person who approves payment.
Require a picking ticket to support any product leaving your warehouse.
Take regular stocktakes and investigate discrepancies.
Pay attention to journals made by your accountant. Take the time to understand why discrepancies appear before accepting them.
Minimise the number of people who can access your financial data and lock the system down to functions related solely to their role.
Be aware of changes to your profitability that market conditions can’t explain
Control the amount of discount your salespeople can give and monitor the GP% of installed jobs
Talk to your insurance broker about insurance against fraud
Put cameras in your warehouse, particularly if it’s unmanned at times of the day.
Trust is a key element of the employee/employer relationship. So, our business environment should not reflect a lack of trust, but rather, sensible business practice that protects the business's interests for everyone's benefit. Often, the thing that keeps us from implementing better, more robust systems is how the staff feel about it. We don’t want them to think that we don’t trust them. We trust our staff until we have reason not to. The better our systems are at preventing and detecting fraud, the less likely we will be to get to that point.
No solution is immune to fraud, but a fully integrated solution, such as RFMS, offers a host of functions to make it harder for dishonest employees to steal and easier for business owners to notice it when it occurs.