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'Trust But Verify' Is How to Fight Back Against Employee Theft and Fraud The people you can trust handling money are the ones who don't bristle at reasonable internal financial controls.

By Daniel DeMeo

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.


Small business success is often the result of a close-knit, dedicated team working long hours to achieve a shared goal. To build a strong employee base that will go above and beyond, small business owners must find trustworthy hires. In fact, I'd argue that a person's character is more important than their skills. One can be taught; the other can't.

It's especially damaging and disappointing when employees abuse the trust placed in them. When there is unethical, or even criminal, activity, small businesses can suffer enormous loss.

A 2016 global fraud study found that businesses with fewer than 100 employees suffered the same median level of theft – $150,000 – as much larger companies. What's more, they are much more likely than the largest organizations to be victimized. The study, by the Association of Certified Fraud Examiners, revealed that the smallest companies accounted for 30 percent of the fraud cases it studied, compared to just 20 percent for organizations with more than 10,000 employees.

Among the most common crimes at small businesses are check tampering, skimming, payroll, and cash larceny schemes. With their insider knowledge, employees know how money is handled and how to exploit weaknesses in accounting systems.

While fraud may be more common than many entrepreneurs think, many losses can be prevented with basic control procedures. The following strategies can limit potential damage and make detection more likely.

Divide responsibilities and broaden oversight.

One person should not have sole control over financial transactions and recordkeeping. Dividing responsibilities and oversight helps create deterrence and increases the likelihood of detection. In the smallest businesses, the owner may need to oversee all financial transactions to ensure that everything is checked and double checked.

Bank accounts should be reconciled at least monthly and should include a review of checks and payments. The person doing the reconciliation should check that the payees, amounts and endorsements are all correct. That same person, however, should not have authority to write checks or makes deposits and withdrawals.

In a very small business, it may be wise to outsource the reconciliation or the transactions function, so there is outside accounting control for certification and signoff.

To further control the flow of money coming in and going out, checks or other payments should require multiple signatures or authorizations.

As a company grows, it should develop a list of approved vendors and suppliers and monitor purchase orders and payments.

Expect and enforce ethical behavior.

The less disciplined style of some entrepreneurial businesses can be abused by people looking to commit financial crimes. While the company culture can be casual, business owners need to make it clear that they are vigilant and have a zero-tolerance approach to unethical behavior. One way to do that is to set high expectations and act quickly and decisively if employees are caught engaging in theft or fraud.

While small businesses are less likely than large ones to have fraud reporting hotlines, they can be very effective. If possible, set up a reporting system that can protect the identity of people voicing suspicions.

Finally, put employees on notice that there will be outside oversight. Have auditors make routine and surprise visits.

Encouraging a culture of honesty can help deter bad behavior and also make it more likely it will be reported when it occurs.

Hire with care.

Background checks have become standard practice. Anyone who will be handling money or who is in a financial role should be thoroughly investigated for past criminal behavior or a suspicious work history. While credit checks may not be needed for most employees, they can provide useful information for people charged with making financial decisions. Entrepreneurs should consult their attorney about the laws in their state, as well as federal laws, governing different kinds of background checks and should get consent as needed.

Make Vacations Mandatory

Once an employee has engaged in fraud, they have to remain vigilant to protect themselves from being caught. They may come to work early in the morning or late at night and avoid taking vacations. Many frauds are uncovered when the perpetrator is away from his or her job for a period of time.

Small businesses can follow the example of the many large banks and other financial institutions that mandate vacations. Enforcing these types of policies on a regular basis can help uncover any ongoing frauds before they escalate.

Build the right team.

At the heart of every great small business is a committed owner who is working day and night to provide a great experience for customers. Unfortunately, there are people who will take advantage of the less structured nature and trust that a small business environment provides. With some key strategies in place, entrepreneurs can deter, detect and root out fraud while still finding the trusted employees they need to build success.

Daniel DeMeo

Finance Expert

Dan DeMeo has more than 12 years of concurrent experience as a C-level officer for CAN Capital, 1st Financial Bank USA, and J.P. Morgan & Co. In these positions, DeMeo was responsible for all finance and accounting activities including planning, investment, management, portfolio and product pricing, and balance sheet management.

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