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What You Should Know: Employee Fraud Awareness

By February 15, 2024Business Advice
Business owner on computer with fraud alert warning employee fraud awareness

Fraud is a nasty word and it’s a serious matter for U.S. businesses in virtually every industry and in companies large and small. A study on corporate fraud by Professor Alexander Dyck reported that 40 percent of public companies were found to be committing accounting violations and 10 percent were found to be committing securities fraud. Employee fraud awareness is important for business owners and employees alike for the good of your business. 

According to a 2022 report from the Association of Certified Fraud Examiners (ACFE) small businesses and private companies rank highest in occupational fraud frequency as compared to large corporations, government entities, and non-profits. The frequency of small business fraud was reported to be 28% compared to larger organizations at 22-26%. Overall, U.S. businesses are estimated to lose an average of 5% of their revenues to fraud each year. Small businesses suffer a median loss of $150,000.

In every business, employee fraud awareness is critical because employees are the first line of fraud defense. Their awareness and actions can make a significant difference in the potentially disastrous impacts of fraud. 

What is Business Fraud 

Business fraud is defined as any illegal, dishonest, unethical, or deceptive actions that are committed by a company or person(s) acting as an employee of a company. These actions are typically intended to give some type of benefit to the acting company or individual. Thus, employee fraud awareness can be a significant deterrent.  

Types of business fraud include asset misappropriation, forgery, identity theft, account fraud, inventory theft, payroll fraud, cash theft, credit card scams, and business email compromises. They include billing schemes, expense reimbursement schemes, payroll schemes, check tampering, and financial statement fraud. 

How Do Businesses Protect Themselves from Fraud 

The first element is employee fraud awareness. Let every employee know that fraud affects every individual and the entire company, not just the person who commits the fraud. Aware and empowered employees become active participants in protecting their organization from fraud, thus protecting a company’s reputation, assets, and financial condition. 

Second, develop a fraud prevention training program. Assess your organization’s needs and develop specific training to address those needs. Provide practical examples. Regularly review and update the training. Encourage and facilitate communication and reporting. Train employees to look for red flags. And train them to look for external threats as well. 

Third, make sure that all employees understand how money flows into and out of your business. Supervisors must know the details of payments, who has the authority to make payments, and who makes sure that payments are legitimate. 

Fourth, create a clear division of duties so that more than one person is involved in financial transaction accounting and reporting. Establish clear checks and balances and a clear reporting process. That can include tip lines and anonymous reporting. 

Fifth, make sure that clear and rigorous processes are established to document and control financial actions. Constantly review and fine-tune financial controls to prevent fraud. 

Basic Fraud Warning Signs 

In addition to training and creating strong employee fraud awareness, business owners, financial managers, and accountants should look for these fraud warning signs: evidence that employees are living beyond their means, unusual email activity, employee resistance to control processes, overly close relationships between employees in key purchasing positions that may cause illegal kickbacks, and evidence of exceptional performance that exceeds normal reality.  

How to Detect Fraud Beyond Employee Fraud Awareness 

Fraud often happens when three factors come together: pressure, opportunity, and rationalization. So, these factors must be kept in mind when assessing potential fraud opportunities. 

Fraud can be detected by using tip lines and anonymous reporting. It can be detected by using external auditors, internal auditors, and professional accountants who have expertise in rigorous accounting practices and business protection activities. 

Seek Professional Accounting Assistance 

Contact Orcutt & Company, based in Milford, OH. We deliver comprehensive financial management for small business owners & individuals, providing strategic solutions that best address client needs and aspirations. Our comprehensive accounting services keep you organized and give you the data you need to make prudent business decisions including bookkeeping, payroll, and tax.