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Employee Fraud Increases
by Marie Bray, CPA, CFE
February 2009
by Marie Bray, CPA, CFE
February 2009
I'm sure the last thing you want to read about now is more about the downturn in the economy and how it can hurt your business. Unfortunately, the recession is now official and it has the power to impact your business in many ways, some of them less obvious than others. The most obvious impacts of the recession currently is the value of the stock portfolio, the value of your real estate, and the cost cutting measures most employers are making in anticipation of the hard times ahead. One of the less obvious impact could be the potential fraud that is brewing in the business right now.
Studies show that employee fraud increases in an inverse proportion to the decrease in the economy. There are several reasons for this. If employees are faced with a decrease in pay, a spouse out of work, or a decrease in their investment income, they will oftentimes look for a replacement for that income instead of cutting back on their personal lifestyles. Alternatively, they may have cut back on their personal lifestyles as much as possible, and now need the extra cash to pay their bills. The decrease of employee perks, such as the holiday bonus or party, may also cause your employees to think, "They took that away, even though I deserved it. I'm going to take this over here to compensate."
According to a study by the Institute for Corporate Productivity Inc. in conjunction with HR.com, 18% of managers and executives at 392 U.S. companies reported a recent rise in monetary theft among employees. 24% of these same managers and executives reported an increase in theft of nonmonetary items.
Therefore, the best thing for a manager or executive to do at this time is to review the internal controls of their business and keep an eye on their employees. An internal control review can be done by a manager or an outside accountant. It requires the reviewer to step back from the process and try to imagine how they could steal from the company if they were in each employee's position. This process requires some creativity as employees will find very unusual ways to steal even if the basic controls are present.
Paying attention to your employees and their personal situations can also benefit the business in the long run. Employees who are in tough financial situations are more likely to commit fraud. These situations can run from medical problems to addictions to simply maintaining their current lifestyle. If you learn of an employee that might be more induced to commit fraud, your next step is to look at their job function and determine if they have an opportunity to steal from the business. If so, you'll want to spend more time reviewing their work or revamping the controls to protect the company's money.
The worst part of fraud for employers is that most frauds and the longest-lasting frauds are done by the trusted employees. I often hear in my discussions with managers and executives the phrase "I trust this employee and don't feel they would steal from me." Unfortunately, it is that employee that will steal from you. When a manager trusts an employee, their work is not reviewed as closely or at all. That employee also uses that position of trust to continue the fraud over time.
In conclusion, please take care of yourself and your business. Pay attention, keep communications open, and get some help if you suspect anything is wrong.
Marie Bray, CPA is a Certified Fraud Examiner and works at the Great Falls office of JCCS.
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