Difficult economic times like these are always accompanied by an increase in employee fraud claims. While most employees are honest and trustworthy burdened by financial stress, otherwise honest employees may be tempted to steal from their employers — the economic pressure allowing them to rationalize the criminal act and downplay the risk of being caught. At the same time, a tough economy is exactly when employers take a hard look at their operations to identify cost-cutting measures and often find that the numbers just don’t add up.
Embezzlement and forged checks, as well as fraudulent bank accounts, expense reports and vendor invoices, impact companies of all sizes but in the case of midsize and smaller companies, the criminal act can shut the doors forever.
Despite this threat, small and mid-size companies confronting a challenging business environment are often pressed to pare expenses. Funds that previously were invested in security measures or in the various types of insurance policies that absorb employee-related fraud exposures are invested elsewhere or simply conserved.
However, it is at this time when companies should work even more closely with insurance brokers and carriers to transfer the risk of employee fraud rather than seeing insurance as an unnecessary expense. \Brokers and carriers can provide invaluable advice on how to reduce fraud threats, identify losses early and limit them once they occur. In this difficult economy, partnering with such experts can help keep the doors open.
A Growing Menace
Anyone picking up the newspaper these days is bound to come upon an article reporting on a local company that endured an unexpected financial loss because of a trusted employee’s criminal mischief. The following three examples come from the blog www.fraudtalk.com. Recently in a single day, 10 news articles on employee fraud were reported across the country. Here are the three with the highest cost:
- The arrest of a California woman for allegedly embezzling more than $785,000 from a construction company, where she had worked as an accountant;
- The sentencing of a Wisconsin man to six months in prison for embezzling more than $140,000 from a church, where he had served as its treasurer;
- The indictment of a woman in Alaska for embezzling nearly $500,000 from the Alaska Whaling Commission, where she was an executive director.
All these crimes share something in common — employees entrusted with duties that were used as an avenue to perpetrate crimes against their employers, in the belief they would never be caught, and employers that lacked process controls to inhibit the fraud.
Preventing Fraud
Fraud affects small-sized companies like these because there’s often a high level of trust among management and staff, which elevates the confidence of the would-be perpetrators because they don’t believe anyone would ever suspect them of fraud. Familiarity breeds a level of complacency that results in a higher susceptibility to fraud.
The following bullet points describe some best practices that companies can use to minimize fraud exposures:
- Segregate job duties so different employees reconcile bank accounts, write checks, and deposit money;
- Mandate finance staff to take paid vacations — often an employee perpetrating a fraud will forego time away from the office to ensure the scheme is not uncovered in his or her absence;
- Regularly scrutinize the veracity of the vendor list, and seek bids every three years from existing and new vendors;
- Conduct background checks of potential hires, and extensive examinations of individuals recruited for sensitive finance positions;
- Conduct regularly scheduled audits of protocols and processes, and spot audits that are unannounced until they occur;
- Work with insurance professionals to beef up anti-fraud measures and transfer remaining criminal risks to an insurance company.