In a previous article, I addressed the risk that an employer faces from employee theft. I also introduced Donald Cressey’s Fraud Triangle and noted that of the three factors common among fraud cases, only the Opportunity is controllable by the employer. This article provides 5 tips for stopping employee theft and thus enhancing the success and survival of the business.
So what can you do to stop employee theft? Susceptibility to fraud can best be minimized by the business maintaining a strong system of internal controls. Space precludes at complete description of an internal control system, but several principles can be identified.
- Separation of duties – record keeping should be separated from physical custody of the assets. For instance, the person who receives money or writes checks should not keep the bookkeeping records. A person responsible for inventory should not have access to the inventory records, nor should they have the ability to ship or receive goods. The person who has custody of a tangible asset – computers, cell phones, and other equipment – should not have access to the property records.
- Paper trail – Every transaction must be supported by documents authorizing the transaction such as sales invoices, shipping documents, and the like. No asset, tangible or intangible should be moved into or out of the business without supporting documentation.
- Physical control – Tangible assets must controlled to prevent unauthorized removal. Sufficient physical security should be established to prevent easy removal of assets. A simple control is to limit employee comings and goings to a single entrance that is continually monitored during working hours. Access to intangible assets such as data should also be controlled. The use of unique user names and passwords and limitation of access will help prevent inappropriate to sensitive information.
- System of Approvals – any transaction that may result in the movement of goods of services to outside the business must have a series of approvals by persons in authority. Policies and procedures should be set up that identify who has the authority to approve purchases and sales at various monetary thresholds. Purchasing staff must be aware of the thresholds and should be held accountable to make sure guidelines are followed.
- Checks and balances – a system should be established in which persons not involved in the transaction are responsible to validating balances or verifying transactions by other departments. The results of these validations must be sent to persons in positions of authority and any discrepancy thoroughly investigated.
Can employee fraud be completely eliminated? While it’s unlikely that employee fraud will be 100 percent eliminated, the occurrence and magnitude of the loss can most certainly be reduced. Admittedly the tips are lacking in detail. You are invited to contact any B2B CFO partner to obtain detailed information on a system of internal controls.