by Michael Iverson
Small-business owners often talk about treating employees like family. They work hard to provide environments that support and nurture employees. The nurturing process involves increasing responsibilities over time. Owners want (and need) to trust their employees to exercise authority and help manage the business.
Occasionally, that trust is misplaced. In recent years, small businesses have been hit by a series of high-profile cases. For instance, the vice president of finance for a Midwestern headphone manufacturer is accused of embezzling more than $20 million over several years.
Physician practice embezzlement is on the rise too, according to the Medical Group Management Association. Three out of four physicians will suffer some financial loss from employee dishonesty during their careers.
No employer wants to dwell on the possibility of employee theft or embezzlement. On the other hand, few businesses can withstand the effects of a prolonged financial crime. Here are three reasonable steps you can take to protect your business:
- Make Vacation Mandatory
- Segregate Duties
- Purchase Fraud-Inclusive Insurance
Most financial crimes require constant attention, even diligence, on the part of the perpetrators. A policy of mandatory vacation time can deter employees from even considering any impropriety. Employees fear that any financial misdeeds will be detected during their absence.
Make the mandatory vacation time commensurate with each employee’s level of responsibility. Don’t allow the vacation time to be taken one or two days at a time. Multi-week absences give a temporary contractor or employee a better chance of uncovering fraud—if it exists.
Other employees, especially those with access to cash and high-value inventory, should also be required to take mandatory vacations. In addition to thwarting fraud, such vacations provide opportunities for employee cross-training.
Through appropriate segregation of duties, it’s possible for a business to remove most temptations to commit fraud. For example, the employee receiving cash should not be the person recording the cash receipts and making bank deposits. The employee receiving high-value inventory should not have any ability to adjust the accounting records pertaining to the inventory.
The idea is to prevent any one individual from having enough responsibility to misappropriate assets and cover their tracks by altering related financial documents.
By their very nature, certain work activities lend themselves to detecting potential crimes. For example, reconciling bank accounts often leads to questions about unusual wire transfers out of a bank account or unrecorded cash withdrawals.
When the person who normally reconciles the bank accounts is on mandatory vacation, make sure his or her temporary replacement completes these reconciliations. Any items that cannot be explained should be brought to the attention of management immediately.
Finally, business owners should be aware that commercial property insurance policies typically exclude from coverage any crime-related losses. It is possible to purchase a separate “fidelity insurance” policy that protects against the risks of employee theft and fraud.
Often a policy requires a rider or notification for processes that could be potential fraud risks. If your business accepts credit cards over the phone make sure your business insurance covers for misuse of 3rd party credit cards. If you keep credit card records on file, how do you secure them from unauthorized use? Does your merchant agreement allow you to maintain credit card numbers on file? Some merchants will not allow you to keep credit cards on file without being what is referred to as “PCI compliant”.
See the advice of your insurance agent or business risk manager to ensure you are adequately covered and in compliance.
If you have questions about preventing or determining employee fraud, contact us. We are happy to assess your situation and make recommendations.