Almost a third of all businesses fail as a direct result of undetected employee fraud. Fraud typically arises from a motive for personal gain, a perceived opportunity, or a rationalization.  Fraud will cost your business, but knowing what to look for might make you less susceptible.

The most common form of employee fraud is time theft – recording incorrect hours worked.  But it can also look like any of these as well:

  • Checks written to an employee or an unknown individual
  • Vendor invoices from nonexistent vendors
  • Inflated invoices from legitimate vendors
  • Payroll checks to nonexistent employees (ghost employees)
  • Inflated or false expense reports
  • Theft of cash, inventory, supplies or equipment

Many small businesses often outsource bookkeeping tasks, however, an unethical internal bookkeeper can engage in fraudulent activities as well.  Here are some red flags you can look for. Take note if your bookkeeper’s behavior changes or they respond defensively to questions about transactions. Asking for signature authority, making transfers among accounts or taking your records home are also red flags.

Hiring Tips to Avoid Problems

If you are hiring a bookkeeper, follow these tips to avoid problems down the road:

  • State the job description and required experience clearly.
  • Perform criminal background and credit checks.
  • Require and call references from other businesses.
  • If using QuickBooks: Set the internal bookkeeper up with access only to data they need to do their  job. Set the external bookkeeper up as an “external accountant” user to restrict access. Never give your admin password to anyone.
  • If hiring a bookkeeping service: Check reviews and confirm that the firm is bonded and insured.

Best Practices to Prevent Employee Fraud

Some accounting best practices will prevent fraud or help detect it and limit losses:

  • Create your own reports from your software to review transactions frequently
  • Never give signature authority or allow your bookkeeper to sign for you
  • Separate duties if possible. As an example, checks should not be written by the same person who reconciles the accounts
  • Have bank and credit card statements mailed to a different address that the bookkeeper does not have access to. This ensures that you can review the statements for unusual transactions.
  • Request check images from the bank or review them online
  • In a larger firm, periodically hand deliver paychecks to employees and require ID to prevent “ghost” employees
  • Require receipts and approval before reimbursing business expenses
  • If the bookkeeper needs online access to bank or credit card accounts, do not share your access.   Setting up separate login and password access allows you to limit permissions, gives accountability and an audit trail.

If you suspect employee fraud, remain calm.  Quietly contact your business attorney, your IT professional and a trusted accountant to ask questions. Make sure the suspected individual does not know they are being investigated until you can take action. This includes immediately backing up your company data, changing all passwords and restricting permissions in your accounting software.  Getting good advice and acting quickly can improve your chances to limit losses and protect your business.

For more information.