In any business – small or large, good or bad economy – internal theft or employee fraud can occur.   Actually, in my experience, I have seen more employee fraud occurring in small to medium-sized businesses because there is a greater level of trust, a less formal process at times, greater familiarity with each person in the company, and a greater breadth of duties for each employee.

While the percentage of employees committing fraud may be low, I have seen some small businesses devastated and almost have to close their doors because of one or more employees who stole from them.

Types of Employee Fraud

There are a few types of employee fraud that are prevalent in small businesses.   One of the easiest ways for employees to steal from a company is through the use of Expense Report Fraud.   Expense report fraud can occur in many ways, but one of the most common forms is to cheat on lodging, meals, airfare and fuel expenses.

For example, lodging fraud can be perpetrated in different ways.   Two employees could share a room but both submit the same room receipt to get reimbursed or an employee could stay in a cheaper room but submit a receipt for a higher-priced room.   Meals expenses are also easy to fudge.   Turning in restaurant receipts even though someone else paid the bill is a popular scam.   There are also ways for employees to make or create their own receipts.   Do a quick web search for “create receipts,” and you will see what I mean.

Inventory Fraud is another broad category of employee fraud.   This usually occurs when the employee either directly steals inventory from the business or indirectly puts money from the company into their own pockets.   For example, when ordering office supplies, an employee goes online to purchase office supplies, then prints out the screen shot of the shopping cart but never actually places the shopping cart order.

The printed screen shot is submitted as paperwork for the bogus order.   You should also be aware that employees could purchase office supplies or other business items with a company credit card and then sell the items purchased on eBay or Craigslist.

Depending on how a company reimburses an employee for driving, it is also possible for employees to submit fraudulent charges for fuel or miles driven.   A simple method is to fill up the company vehicle or personal vehicle and then continue to put fuel in a second vehicle without ever stopping the pump.

Lastly, employees could commit fraud by falsifying training or conference attendance.   Again, this can be done by creating their own grades, transcripts, diplomas, or attendance certificates.

Measures to Reduce Employee Fraud

• Establish an employee expense policy outlining what employees will and will not be reimbursed for as well as the type of documentation that will be required to get reimbursed for any business-related purchases.
• Require original receipts – not itineraries, copy of receipts, shopping cart screen shots, packing slips, or similar types of documentation.
• Set up a review process for all expenses that are submitted. Create an expense timeline to see if the purchases could actually have been made as they are outlined on the expense report.
• Check with the hotel, airline, conference, training facility, or other entity where the expense occurred if you suspect that the expense or purchase may be fraudulent.
• Look for missing items on receipts, such as an order confirmation number for online orders. Only accept the printed online receipt, not a screen shot or other documentation for these orders.
• Set up orders for day-to-day business supplies directly with a supplier and avoid purchases made by employees except in emergencies.
• Whenever possible, which is sometimes harder in small and medium-sized businesses, divide duties between employees so no one employee has control over the purchasing, receiving, and expense reconciliation of business functions or purchases. Keep everyone accountable.

As a small or medium-sized business, you don’t need to treat everyone with suspicion or as a criminal, but you do need to protect the profitability of your business by taking steps to reduce the risk of employee fraud or other security incidents from occurring.

About The Guest Author: T. Sean McCreary, CPP, ARM is the principal security consultant and researcher for Business Security Information which provides physical security, computer security and fraud information and consulting services for small and medium sized businesses.