Prevent Workplace Fraud and Theft: Six Tips

Create strong internal controls and trust your instincts.

March 25, 2014

Whether it’s downloading and sharing company confidential information or manipulating expense reports, employee theft and fraud is a serious issue for businesses.

In fact, employee fraud can siphon off 5% of organizations’ annual revenue, according to a survey by the Association of Certified Fraud Examiners.

The Small Business Administration offers six tips to prevent and manage employee theft or occupational fraud:

1. Use pre-employment background checks wisely

One of the first steps to preventing fraudulent employee behavior is to make the right hiring decisions.

Basic pre-employment background checks are a good business practice for any employer, especially for employees who will be handling cash or who have access to sensitive customer or financial data.

Be aware, however, that laws vary from state to state on whether private employers can consider an applicant’s criminal history when making hiring decisions. Check with your local Equal Employment Opportunity Commission office the laws in your area before going down this path.

2. Check candidate references every time

Too often, employers fail to check candidates’ references, often assuming that references will never be anything but glowing.

But it’s a smart practice to check references, particularly those of former employers or supervisors to unearth any prior fraudulent activity.

3. Communicate conduct guidelines

Every business needs an employee code of ethics and conduct. While this code won’t necessarily prevent criminal or fraudulent behavior, the standards it outlines will set a clear benchmark for employee behavior and guidelines on how to do business.

Once developed, the code of conduct should be documented and agreed to by all new employees (and current employees if you haven't put a code in place yet). Include in this code policies that cover the protection of company data, the avoidance of conflict of interests, and, of course, obeying the law.

Use employee orientation as an opportunity to go over the code of conduct and explain any areas that are unclear. Then, revisit the code each year and be sure to add any new considerations that may have materialized.

4. Conduct regular audits

Auditing may create the feeling that Big Brother is watching, especially in a small organization. But conducting regular audits can help you detect theft and fraud.

Audits also can be a significant deterrent to fraud or criminal activity because many perpetrators of workplace fraud seize opportunity where weak internal controls exist.

Identify high-risk areas for your business and audit for violations every six to 12 months. These could include business expense reports, cash and sales reconciliation, vacation and sick day reports, and violations of email/social media or Web-use policies.

5. Recognize the signs of fraud

Perpetrators of workplace crime or fraud often justify their actions: they’re under pressure, feel under-appreciated, or perceive that management behavior is unethical or unfair.

Some potential red flags to look out for include:

6. Set the right management tone

One of the best techniques for preventing and combating employee theft or fraud is to create and communicate a business climate that shows that you take it seriously.

Some simple ways you can keep your finger on the pulse: