Business Law: Preventing Employee Fraud

By Nina L. Kaufman, Esq

Fraud doesn't happen in publicly traded, headline making companies alone. In fact, small businesses are often particularly vulnerable to employee fraud. Why?

Largely, because they lack the oversight and controls that exist in larger, more hierarchical companies. Small business owners tend to be so relieved to find an employee to take time-consuming tasks off their hands that they don't want to have to bother looking over an employee's shoulder. "Isn't that why I hired this person?" asks the business owner, "so that I wouldn't have to spend time either doing or micromanaging this task?"

In a word, yes. But being the captain of your company's ship, by definition, requires at least some supervision, making sure that all are working harmoniously with the best interests of the business in mind. The costs of failing to oversee your employees - especially the ones with check writing and other financial authority - can be enormous! According to statistics of the Association of Certified Fraud Examiners, the average fraud scheme is perpetrated over an 18-month period and can cost a small business more than $125,000.00 in losses.

Here are some simple steps that business owners can take to protect themselves:

1. Write the checks yourself. If you find this inconvenient, consider delegating the check-writing and check-reconciling duties to two different employees.

2. Ask your bank to send account statements to your home, instead of the office. This gives you an opportunity for a first glance at the statements to make sure nothing is awry.

3. Minimize the number of people who can authorize purchases, and set limits on the amounts of those purchases.

4. Be alert to checks written to made-up or already-terminated employees, unfamiliar companies, and companies that have no connection to your business (e.g., payments to a lawn-care company when you operate your graphic design business out of your spacious SoHo loft).

5. Have your accountant review the books from time to time - and do so unannounced, so as not to give your employees a "heads-up."

6. Before hiring employees who will have financial access and authority, consider doing a background check to ensure there are no prior convictions for theft or forgery.

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker