Employee fraud is never an easy topic to discuss, but it’s especially hard to talk about with the owners of small businesses, where employees often feel more like family. While it’s counterproductive to spend every day looking at your employees and wondering who is stealing from you, implementing checks and balances on your employees can be constructive, helping to deter and detect fraud as well as maintain the family-like atmosphere at your business.

The key to protecting any business from employee fraud is to build systems, processes, and controls that make it hard for workers to steal from the company. To do this, employers need to overcome some of the biggest myths and misconceptions about workplace fraud. Here’s a look at some common false assumptions that small business owners make about employee fraud, along with some hard truths, from the Association of Certified Fraud Examiners’ “Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse” (the ACFE report):

  1. “It will never happen to me.” Fraud is much more common than most business owners are willing to believe. Some studies estimate that U.S. businesses lose as much as $50 billion a year to employee theft. The ACFE report looked at 2,690 cases of employee fraud in 2016 and 2017. The victims were almost evenly distributed among small, medium, and large organizations.
  2. “I trust my employees. They would never steal.” While the ACFE report showed a somewhat even distribution of employee fraud across businesses of all sizes, there was a different result when it came to amounts. Surprisingly, the smallest businesses in the survey suffered the highest median loss at $200,000 per incident. With fewer resources, these businesses are more likely to delegate greater responsibilities to a smaller group of trusted employees. This concentration of workflow in a few key individuals gives a fraudster more opportunity to pilfer assets and cover his or her tracks.
  3. “In a small business, a crook is bound to stand out.” Although there are some behaviors that might tip off a boss to a crooked employee, there is certainly no reliable demographic profile of a “typical” fraudster. The ACFE report details fraud schemes perpetrated by people from all walks of life, including:
    • All ages, although the largest median losses are caused by people 56 and older.
    • Both genders, particularly in the U.S., where 58% of fraudsters are men and 42% are women.
    • All educational levels.
    • All levels of authority, although owners and executives cause nearly six times the median losses caused by managers and 17 times the losses caused by lower-level employees.
  4. “He/she has been with me from the beginning and would never steal.” The longer someone has been with a business, the more they might know about how to steal and get away with it. The ACFE report found that frauds committed by employees who had been at their companies five years or more caused a median loss of $200,000; those who had less than five years’ tenure caused a median loss of $100,000
  5. “We conduct background checks, so we should be safe.” Background checks can’t find every bad actor. The ACFE report found that only 4% of perpetrators had any kind of prior fraud conviction. In many cases, businesses that have been victims of fraud will dismiss an employee quietly and refuse to prosecute for fear of bad publicity. Over the last 10 years, referrals to prosecutors have declined 16%.
  6. “We would notice if someone was stealing from us.” Sure, you might find out. But the important question is: How soon will you notice that someone is stealing from you? Fraud schemes often go undetected for a year or more. According to the ACFE report, the median duration is 16 months, and even that number can be misleading. Many fraud investigations only go back three years due to statutes of limitations. A study from insurer Hiscox found that 28.7% of employee frauds went on for more than five years.
  7. “We are a small business and can’t afford internal controls.” The majority of fraud schemes are relatively simple and can be deterred or detected by no-cost and low-cost internal controls. An ounce of fraud prevention can cost significantly less than pounds of post-fraud cures.
  8. “Our business has internal controls that will protect us from fraud.” Internal controls do make it harder for individual employees to successfully defraud a business. However, relying on internal controls without testing or reviewing their effectiveness regularly can be like having no controls at all. Additionally, if multiple employees collude to circumvent controls, their effectiveness declines. And median losses generated by fraud double when two or more fraudsters collude.
  9. “My accountant will catch any fraud.” Financial statement auditors and tax return preparers are not actively searching for fraud. They are experienced at determining the materiality and deductibility of items on your balance sheet and income statement. Fraud and forensic examiners, on the other hand, are specifically trained to note and investigate any irregularity in the finances of a business.
  10. “Insurance will cover any fraud losses.” Most small businesses have limited employee fraud coverage in their insurance policies. Unless employee fraud coverage limits are regularly reviewed or fidelity bonds are purchased for certain employees, small businesses will typically be underinsured and will recover little, if any, of their losses. Of the 2,690 cases studied in the ACFE report, only 15% of victims recovered all their losses. Over half the victims, 53%, recovered nothing. The report showed that the greater the loss, the less likely the victim was to make a full recovery.

The key to preventing employee fraud isn’t to start treating all your employees like thieves. Employee frauds are crimes of opportunity and familiarity. The best way to limit these opportunities is to consult with specialized fraud and forensic examiners. A thorough review of your business’s exposure to employee fraud is the first step toward improving its financial security. Contact CRI for help getting started.