Don’t Let Employee Theft Happen In Your Business

August 21, 2018

All businesses need an effective system of internal controls that requires employees to adhere to policies and procedures to minimize possible errors in operations and data in addition to safeguarding assets. Without a strong system of internal controls, it's difficult to know for sure if procedures are followed, quality is up to standards, financial information is accurate, and assets physically present. The result is when a business has tight controls, it operates more efficiently, has reliable financial data, and has less chance of theft and fraud occurring in the business. 

Fraud and theft continue to plague businesses of all sizes. Small businesses and SMEs are not exempt. While micromanagement and paranoia are not attractive qualities that small business or SME owners necessarily want, it is nevertheless important for owners to be aware that theft happens frequently. It can occur with cash receipts, receivables, payables, or inventory. 

Routine controls can help prevent employee fraud and theft. The following 10 safeguards are actions owners and managers can take to guard against internal misappropriations: 

Review financial statements

Financial statements should be reviewed monthly for unusual occurrences between the current month and prior month. There should never be only one individual who is responsible for both financial oversight and preparation of financial statements. If the business is too small to have segregation of duties, then the owner must be personally involved in this area. Controls and oversight can reduce, however does not completely eliminate, the possibility of business fraud.

Review the budget

Budgets even for small businesses and SMEs should be prepared. Actual performance can then be compared to budgeted figures and reviewed for variances. Large discrepancies can be a red flag of possible unusual activity that should be investigated.

Mandate employee vacations

Although this might seem insignificant, employee vacations should be mandatory for everyone. When an employee is gone for a week or two, any misappropriations or procedures not being followed will possibly be highlighted.

Monitor expense reports and reimbursements

All expense reports and resulting reimbursements should require documentation and appropriate approvals. Without these controls, expenses can be inflated reducing net profit.

Establish payroll controls

Every employee added to the payroll should have HR or owner approval to eliminate the possibility of a fictitious employee being paid but the paycheck going to someone else. As a secondary control measure, the payroll should be reviewed to ensure duplicate checks are not paid to the same employee. 

Check hourly employees

Make it a practice for all hourly employees to have hours approved before a payroll is processed and salaries are paid.

Review repair/maintenance and miscellaneous expenses accounts

The repair and maintenance account as well as the miscellaneous expense account should be reviewed monthly for any unusual items. This review guards against non-business expenses being categorized to these accounts and disguised as business expenses.

Segregate check writer and check signer duties

The same employee should never perform these two functions. Segregation of duties is most important. An additional safeguard is for the check signer to be an employee not in the accounting or finance department.

Reconcile payments to vendors

To prevent fictitious invoices from being paid, purchase orders and receiving reports should be reconciled prior to payment.

Control inventory and supplies

Small items and supplies have a way of disappearing and should be supervised and locked whenever possible. For larger items, periodic physical inventories should be taken and reconciled with what the financial statements show the inventories should be (known as book inventory). 

Control is the Key

Regardless of the amount of control measures, nothing is 100% foolproof. For every control measure, there can be an employee trying to figure out a way to mitigate the controls. The plan might be the theft of assets, completing a job below standards, or colluding with an outside vendor. Whatever illegal scheme that might be perpetuated upon a business, the illegal scheme hurts that business financially. This does not have to happen. Once controls are in place, however, they must be periodically reviewed and revised. Internal controls are always a work-in-progress.