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Pinnacle e-Letter

Protecting Your Business From Employee Fraud
By Vickie Manning, Area Executive for Franklin and Cool Springs, Pinnacle Financial Partners

Until recently, I had never in my more than 20 years of financial services experience seen a client hit by employee theft. In the past year, I have seen two clients become victims of employee fraud.

In one case, the employee had been originating ACH transactions under her own name. The other situation, which went undetected for over two years, involved a bookkeeper who'd been given authority to write checks. For months now, both companies have been consumed with trying to reconcile their accounts. To date, not all of the money has been recovered. Both learned the hard way that implementing procedures to monitor and restrict activities can save significant time and money in the long run.

Like many business owners, these companies dismissed employee fraud as something that plagues other organizations. They had an "it won't happen to me" mentality. The truth is employee fraud is surprisingly common and can devastate your business.

Scope of the Problem

Roughly $652 billion, or 5 percent of the U.S. gross domestic product, was lost to employee fraud in 2006, according to the Association of Certified Fraud Examiners (ACFE).

And it's not just big corporations that are getting hurt. Surprisingly, the average loss in a small business ($197,000) is more than the average loss in large companies ($97,000).

On average, it takes 18 months before a business realizes it's been victimized.

The amount of theft increases with the person's education. The median loss generated by a high school graduate is $100,000, compared with $425,000 for a person with a postgraduate degree.

Just because someone has worked with you forever doesn't mean that person is trustworthy. In more than a third of fraud cases detected, the offender has been employed by the organization for more than 10 years.

Preventing Employee Fraud

So how can you combat employee fraud within your organization?

• Set the tone. Be clear with employees that your company will not tolerate any unethical behavior. Create a fraud policy that outlines the actions that constitute fraud, how fraud can be reported, and the consequences of noncompliance. In addition, open lines of communication, employee recognition, and fair practices have been shown to deter employee fraud and theft.
• Don't give a single individual full control. Segregation of duties is critical. Authorization, custody, record keeping, and reconciliation responsibilities should be divided between staff members. Avoid at all costs entrusting one person with all of these duties. For example, don't allow the person who sends the invoices to collect the mail and prepare bank deposits.
• Use online banking to monitor your accounts. Frequently checking your account in online banking can help you identify potential fraud in real time. A quick glance at transactions can help you check that the amounts and serial numbers are within the right range. Make sure that any withdrawals are from trusted business partners and are for the expected dollar amounts. Time is of the essence. The faster you know about fraudulent activity and report it to your bank, the better chance you have of avoiding a loss.
• Conduct regular (and irregular) checks. It's crucial to reconcile your bank statements each month to reveal any suspicious activity. Surprise reviews are another way to help detect any incidents early on or, even better, prevent them completely. You may also want to consider having a third party audit your books once a year.
• Take advantage of ACH debit blocks or filters. Your bank can put debit blocks on accounts that shouldn't have ACH debits. ACH filters allow you to cull out suspicious debits by imposing size limits and authorizations on who can debit the account.
• Revise your check policies. Require two signatures on checks over a predetermined amount. Never pre-sign checks, and avoid using signature stamps. Sign every payroll check personally. Regularly inventory blank checks.
• Buy insurance. An insurance policy that covers employee theft, outside crime, and computer fraud acts as a safety net to protect your business. In many cases, the person who committed theft is long gone before the fraud is even detected. Even if the person is caught, there's no guarantee that you'll get your money back.
• Stay on guard. Be on the lookout for employees who suddenly begin wearing more expensive clothing and jewelry or have other unexplainable rises in living standards. Be alert to personal situations, such as becoming a single wage earner or encountering other financial difficulties.

Vickie can be reached at (615) 744-3793 or vickie.manning@pnfp.com.

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