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  • Writer's pictureMichael Blevins

Guarding Against Employee Fraud: A Serious Business Concern

When faced with a discovery of employee fraud, the initial reaction often echoes, "This is the last person I would have expected this from. They were like family to me." This narrative is a recurring theme in numerous business publications, illustrating cases where long-trusted employees commit embezzlement over extended periods. This problem transcends company sizes, affecting small, medium, and large enterprises, involving employees at various levels, including shareholders and partners. Gender bias is absent, and the perpetrators typically lack a prior criminal record. The malfeasance often begins with small amounts and escalates unchecked, resulting in substantial financial losses, sometimes totaling in the millions. The aftermath requires collecting three dollars in additional fees for every embezzled dollar to recover the losses.


Want some examples?  I found the following fraud related headlines from just Southern California in the past few months:


  • Local youth football parents say assistant coach stole thousands from team – Fox5 San Diego 9/23/2023.

  • Official charged with embezzling more than $14 million from OC school district – Orange County Register 10/19/2023.

  • Home Depot employee allegedly embezzled $1.2 million in cash in California – The Hill 10/23/2023.

  • Attorney General Bonta Announces Charges, Arraignments in Over $8 Million Embezzlement and Tax Fraud Case in San Bernardino County – 11/01/2023.

  • Former employee accused of embezzling $173,000 from Temecula printing business – ABC7 Los Angeles 12/23/2023.  

 

It should be noted that we seldom hear about cases like these, because employers oftentimes choose not to pursue them for various reasons – one being they would rather not be in the headlines for this type of ‘event”.   

 

The Pervasive Nature of Fraud

Employee fraud persists as a serious issue, exacerbated during economic downturns. Many business owners have a false sense of security, believing their employees are immune to such behavior. Blind trust coupled with a lack of internal controls can lead to serious consequences, potentially allowing fraudulent activities to transpire under one's nose.

 

Understanding the Roots of Fraud

Fraud typically stems from three main factors: need, opportunity, and rationalization. When these elements converge, the likelihood of fraudulent behavior increases. The need for extra money can arise from personal financial struggles, life changes, or external pressures, while weak internal control systems provide the opportunity for errors or intentional fraud. Rationalization often follows a lack of integrity from top management, creating a culture where questionable behavior is tolerated or even justified.

 

Preventing Fraud

Effective prevention involves addressing each of the three contributing factors. While it may be challenging to control employees' needs and rationalizations, opportunity can be significantly reduced through a robust internal control system. Vigilance, coupled with a commitment to fraud prevention, serves as a deterrent for potential wrongdoers. Internal controls comprise three vital components: the control environment, control policies and procedures, and monitoring and adjustment.

  

Components of Internal Control:


  • Control Environment: Emphasizes the company's commitment to control and quality, including factors like integrity, ethical values, management philosophy, and human resources policies.

  • Control Policies and Procedures: Specific measures put in place to prevent or detect errors, tailored to the company's risk profile, including areas such as cash management, expense reporting, and trust accounts.

  • Monitoring and Adjustment: Regularly assessing the effectiveness of the internal control system, staying updated on potential fraud schemes, and making necessary adjustments to prevent new threats.

 

Recognizing Warning Signs

Certain indicators can signal potential fraud, including irregular bank reconciliations, delayed financial reports, consistent errors in reporting, employees refusing vacation, employees living beyond their means, and a hands-off management style. Proactive attention to these warning signs can aid in the early detection and resolution of fraudulent activities.



Fraud remains a prevalent threat to businesses, with small enterprises being particularly vulnerable due to their lean administrative structures and a culture of trust. Combatting this issue requires a proactive approach, including healthy skepticism, awareness of employees' situations, strong internal controls, effective policies and procedures, and regular monitoring and adaptation. While complete elimination of the risk is impossible, implementing these measures can significantly mitigate the potential for fraud, offering business owners a better night's sleep knowing they are actively safeguarding their firms.


Article author Michael Blevins is a Certified Fraud Examiner and can be reached at www.BlevinsAssociates.com

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