It only takes one - Protecting the firm from Employee Fraud

A wise man with a profound limp once said, “If you’re gonna shoot yourself in the foot try to keep the number of toes lost to a minimum.” Actually, I just made that up but for small businesses just starting off - establishing good internal controls against employee theft is the best way to keep the gun in the holster and the little piggies happily unaware of the looming danger.

Larger firms can have entire departments set up to protect the firm from fraud and or theft from internal and external sources. A small fry usually does not have this luxury. A small company can find itself with one employee responsible for many tasks. This in itself is like putting a blindfold and cigarette on your pinky toe. An entrepreneur may have to lean on very few employees carrying out many tasks. If only one person overseas the books of the firm and there are no internal controls to make sure that everything is on the up and up bad things may and often do happen. How can an entrepreneur, operating on a shoestring budget, protect himself and his company from employee fraud?

The first step is the simplest and most important. An entrepreneur must come to terms with the fact that he or she will need to implement internal controls. In a perfect world, everyone we hire will be the type of person who, when finding a quarter on the street, canvasses the neighborhood in search of its rightful owner. Most people are trustworthy but it only takes one, creative individual with a gambling problem or perceived slight from the boss to put the company out of business. By establishing, maintaining and monitoring internal controls employees will work in an environment where they see there will be a consequence to their actions should they decide to do the wrong thing.

Let’s assume an entrepreneur realizes the importance of establishing controls that protect the firm from risk. Additionally, the business owner also knows that keeping the employees motivated, well compensated and enthusiastic about their roles in the firm is a great way to nip any potential malfeasance in the bud. What are some simple steps a small business owner can follow to ensure that employee theft will not be the kiss of death to his or her dream?

Let’s start with those pesky internal controls. Separation of job functions and duties is a must. Avoid situations where one person is responsible for recording a transaction and process the same. There should be, at lease two sets of eyes looking over the books.

Keep confidential information…confidential. Only those people in the firm authorized to the information found on financial or banking statements should have access to this information.

Establish policies that are crystal clear to all the employees that detail how all financial transactions will be handled. Additionally, let it be known what will be done should any of the policies be violated. Take the time to educate the employees on the rules and policies of the company and refresh this training periodically.

Hire good people and the best way to hire good people is to not only collect references but check those references thoroughly. Contact previous employers. Verify school records and degrees. A credit check is a good way to check the financial health of the prospective employee.

Put a little box outside your office where employees can anonymously slip a note to those concerned of any potential violations of the firm’s policies. Without this confidentiality employees may be reluctant to report infractions for fear of backlash from their fellow employees.

Check the books often and try to be a little unpredictable on the timing of audits. It will be difficult for someone to launch a scheme if they do not know when an audit may occur. Additionally it may be a good move to hire an external firm to come in occasionally to check the books. An outside firm can bring a fresh prospective to finding fraud and updating controls against fraud or theft.

Be a good boss. If the boss ignores rules and regulations, the employees may follow suit. On the other hand if the employees see the boss as a straight shooter who follows the rules and deals in an honest manner then this can motivate the employees and instill an environment of honesty and trust.

Keep your powder dry and your toes intact. Protect your firm and your dream by establishing safeguards against employee fraud.