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Cyber Risks & Liabilities – Proper Employee Management to Reduce Fraud

It’s an employer’s worst nightmare—an employee is dissatisfied with his or her job and decides to defraud or steal from the company. There are plenty of stories about employees committing these crimes and causing enormous damage. By recognising signs of occupational fraud and implementing practices to prevent it, you can lead a happy and productive workforce.

Fraud Facts

Types of fraud include embezzling, insider trading, forging cheques, expense reports and vendor invoices, or any other type of internal fraud.

Small businesses are more at risk because owners inherently treat their employees like family, leading to complacency and lax security measures. Small businesses also tend not to have anti-fraud measures in place as many lack the know-how and enforcement capabilities of larger businesses. Nearly half of victim organisations do not recover any losses that they suffer due to fraud.

The Fraud Triangle

Certain conditions are present when an employee commits fraud—these three conditions are known as the ‘fraud triangle’.

  1. Motive—The defrauder must have a motive to commit fraud, and this motive is often pressure. This can come from feeling too much stress at work to meet deadlines or trying to live a lifestyle that is above his or her means. Outside problems can exist as well, such as a gambling addiction. Monetary gain is often the motive behind employee fraud.
  2. Opportunity—If anti-fraud measures are too lax, the opportunity can be there for fraud to occur. Even if the perpetrator is financially stable, the opportunity to commit fraud for financial gain might be too much to pass up. Being employed in a high-level, trustworthy position can also lead to opportunity.
  3. Rationalisation—The perpetrator must be able to justify his or her actions. If employees sense some sort of wrongdoing from the company, they might be able to justify the fraud. They may also tell themselves they are just ‘borrowing’ money from the company with no intention to pay it back, or they might feel entitled to a raise and will commit fraud to give themselves that ‘raise’.

Understanding these conditions can be the key to recognising if fraud is occurring at your business.

Recognising Employee Fraud

It is often difficult to recognise when a fraudulent act has occurred. Frauds last a median of 18 months before being detected, according to the Association of Certified Fraud Examiners’ study. Workplace frauds are much more likely to be detected by anonymous tip than by any other means. Because of this, many companies have set up employee tip lines to try and catch the person(s) responsible for wrongdoing.

While detecting fraud may be a difficult task, there are a variety of warning signs that an employee might be defrauding your business, including the following:

  • Invoices from fake supplier—an employee can create a fictitious supplier, post a cheque to the fake supplier with your business’ name on it and then cash the cheque for themselves.
  • Missing property—laptops or other computing equipment can be an easy target for employees.
  • Fraudulent expense reports—some company reports are merely skimmed over for approval, offering an employee an easy way to fake expenses.
  • Forged cheques—if an employee consistently works around a high-level executive, it becomes easy for the employee to forge signatures.
  • Employee lives beyond his or her means—if an employee is living a lavish lifestyle on a modest salary, he or she could defrauding the business. Alternatively, an employee who is having financial troubles yet seems to be living within his or her means may indicate fraud is a possible cause.
  • Unusually close association with a competitor—if an employee seems to have a close relationship with a direct competitor, he or she could be sharing your trade secrets in return for money.

Preventing Employee Fraud

If you run a small business, chances are you have a few employees that are in charge of several different areas of the organisation. Split up the duties among a larger pool of employees to decrease the likelihood of fraud.

Perform a pre-employment screening on all potential employees. A resume might not tell the entire story about a prospective employee’s past.

Let employees know there are policies on employee theft in place. Don’t assume they are already aware of the policies and the consequences of fraud.

According to ACFE’s study, more than 80 per cent of the frauds in the report came from employees in one of six departments: accounting, operations, sales, executive/upper management, customer service or purchasing. Recognise these high-risk departments as potential sources of fraud and implement the proper policies to prevent it.

Establish an anonymous tip line that employees, clients or suppliers can use to report cases of fraud.

Don’t get complacent. Any employee can commit fraud at any time. While most fraud is committed for monetary gain, that doesn’t mean an employee won’t commit fraud if the opportunity is there.

Conduct random audits. Work with an accounting professional to set up and maintain effective internal financial controls to ensure you’re not losing money as a result of fraud.

Proper Employee Management

One of the best ways to prevent employee fraud at your company is to ensure all your employees are satisfied with their work and the company as a whole. Lead by example—if you and your high-level management team conduct business properly and ethically, your employees will likely do the same. Good ethics also carry over into the market, where your company will be looked on favourably, which can lead to higher revenue and greater goodwill from the community.

Reward employees for doing well. Let them know how important they are to the success of the business. Don’t emphasise only the things that haven’t been achieved—focus on the positive, too.

Insuring Against Employee Fraud

Recognising and preventing occupational fraud can be a daunting task. Contact Sirelark Risk Services today. We have the tools necessary to ensure you have the proper cover to protect your company against losses from employee fraud and maintain a productive workforce.

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This Cyber Risks & Liabilities document is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact a legal or insurance professional for appropriate advice. © 2012 Zywave, Inc. All rights reserved.

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