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4 Ways Management Inadvertently Encourages Employee Fraud

$40 billion: That’s how much American businesses lose to employee fraud and theft each year. Whether it’s by embezzling or misappropriating funds, misrepresenting travel expenses or sales numbers or simply taking home office supplies from the department closet, employees are costing employers a lot of money, both in losses from the theft and in the time and costs associated with investigating — and in some cases, prosecuting — cases.

There are a number of reasons theft is such a major issue. In many cases, it’s due to employees’ mistaken belief they aren’t hurting anyone with their actions. In other cases, it’s a systematic, well-planned scheme designed to hit a business where it hurts. But one of the most common reasons for employer theft is management inadvertently encourages it or creates an environment in which fraud and other illegal activities can take place and thrive.

4 Ways Management Inadvertently Encourages Employee Fraud

Managers and business owners may bristle at the suggestion they aren’t preventing fraud, but according to experts in fraud investigations, the problem is all too common. Learn from these experts and consider whether your business engages in practices that encourage fraud.

Inadequate Policies And Enforcement

One reason employees think they can get away with fraud or theft is they can’t find any policy that expressly prohibits a particular behavior — and they think no one is looking. For example, it doesn’t take long for employees to realize the accounting department doesn’t scrutinize expense reports closely. Perhaps employees are regularly reimbursed without having to produce receipts. Your employees may appreciate the reduced paperwork burden, but by failing to enact, communicate and enforce strict policies, you’re opening the door for employees to take advantage and harm the bottom line. Having policies to govern activities that could lead to fraud and theft doesn’t guarantee it won’t occur, but it shows you’re paying attention, and creates a foundation for an investigation and disciplinary action if a violation occurs.

Ignoring Warning Signs

Employee behavior is often the biggest tip-off that something suspicious is going on. Perhaps your employee has a lifestyle that seems inconsistent with his or her salary, or he or she is barraged with collection calls from creditors all day. Investigators of theft claims often point to reluctance or refusal to take vacations as a clue that fraud is happening; working alone during off-hours or taking work home can also indicate an investigation is in order. Keep in mind any one of these signs can be present when an employee is innocent — perhaps a spouse makes more money or the employee wants to save vacation days — but pay close attention to this kind of employee behavior. Combined with other clues, like inconsistent balance sheets or missing petty cash, these signs could indicate a problem.

Lack Of Specific Goals

Not having specific goals can impact your business in a number of ways, but one of the most devastating is it creates an environment that encourages fraud. In a sales environment, when employees do not have goals, it’s much easier for them to “skim” from sales without anyone noticing. In all environments, when employees don’t have goals for their performance, they will often do enough work to meet their job requirements — or sometimes, not even that. Goals keep everyone accountable, and when an employee consistently fails to meet his or her goals, it could be due to fraud. Remember, fraud isn’t just financial; businesses lose money due to unproductive employees as well. Simply take a sick day and heading to the beach instead can be considered fraud, and an employee who routinely takes advantage of your liberal time-off policies will have trouble meeting goals.

Inadequate Employee Background Checks

Failing to run background checks on prospective employees can cost you. These days, anyone can claim to be someone they are not or to have credentials they don’t have. An applicant could fail to mention aspects of their background that would raise red flags, such as criminal convictions or serious financial issues. While it may seem unfair to deny employment based on mistakes someone made years ago, protecting your bottom line is more important. When you fail to thoroughly investigate an employee and discover who he or she really is, you could be opening yourself up to significant losses down the road.

By working to counteract these common causes of fraud, you can protect your business. If you suspect fraud, you may need to retain the services of an experienced investigator. Keep in mind a determined thief will look for ways to circumvent your roadblocks. Constant vigilance, regular audits and a culture of zero-tolerance will go a long way to keeping them out and your revenues high.

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