Are Your Employees Honest?
By Julie M. Quink
J.M. O’Brien & Company, PC
As a culture, we believe that people are honest. Failures like Enron and WorldCom, whose combined fraud losses totaled $46 billion, have taught us to be more aware and skeptical.
What is fraud?
Fraud is an intentional act that results in misrepresenting financial information (lying) or misappropriation of assets (stealing).
Statistics indicate that:
- 10% of employees would never, ever commit fraud;
- 10% of employees are actively exploring ways to commit small scale fraud against their employer;
- 80% of employees would never commit fraud unless certain factors are present.
These factors are:
- pressure – a financial need created by gambling addictions, substance and alcohol abuse, family illness;
- opportunity – the ability to access cash or items easily convertible to cash (inventory);
- rationalization – the feeling of entitlement or the feeling that there is no other way to financially meet the pressure unless they take funds from their employer.
Otherwise honest employees may commit fraud under these circumstances.
Indicators that an employee may be committing fraud include the appearance that the employee is living beyond their lifestyle, suspected or known substance or alcohol abuse, and resistance to relinquishing control of duties to others.
Common ways fraud occurs
The most common ways that an individual can misappropriate funds are:
- creating fictitious employees on the payroll system and generating payroll checks that the employee cashes – ghost employee scheme;
- creating fictitious vendors and generating checks to themselves for goods and services never received by the company– ghost vendor scheme;
- taking customer checks or cash before being deposited into the Bank and modifying the accounting records to conceal the theft.
Preventing and deterring fraud
Simple ways to prevent or deter fraud include:
- Receipt of unopened bank statements by owner for independent review of monthly activity;
- Varying of procedures – review the payroll journals or sign vendor checks, if another individual is typically responsible for those areas;
- Inquire and observe in areas that pose a concern – the mere fact that someone is reviewing activity or inquiring may deter fraud from occurring;
- Enlist the assistance of your accountant to review evidence and documents.
A small business owner cannot afford not to be aware of fraud indicators and the associated risks. Simple monitoring tasks can assist in preventing fraud losses.
Winter 2006 -Volume 16, Number 1
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