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Controls Can Prevent Employee Theft

September 25, 2023
Bill Kimball

If you can’t separate duties between two people, use an outsourced service to do the bank reconciliation and check the audit trail report. Just the threat that someone is looking over your ‘trusted’ employee is enough to help deter theft. No system of internal controls will prevent all theft, but without proper separation of duties, your risk goes way up. Today, more than ever, employee theft has become major problem throughout the country for small businesses. Business owners, faced with long workdays don’t have the time to watch over these employees to make sure that there is no pilfering going on.

internal controls to prevent theft

You need to document what records are required to generate an invoice, and who performs each task. This internal control is in place to prevent the theft of tools and equipment, and a business should have controls over every type of asset that is subject to theft. Restrict use of agency credit cards and verify all charges made to credit cards or accounts to ensure they were business-related. Adam is a nice, quiet employee who works day and night in his office. If you aren’t ready to outsource just yet, here is a checklist of the top 25 controls to help reduce your risk of fraud…

How To Prevent Theft

Evaluate the Executive Director’s performance annually against a written job description. Inform employees of appropriate use of the cards and purchases that are not allowed. Consider that finding ways to improve employee loyalty will have the same affect on reducing the employee’s likelihood to steal.

The problem with limited or no internal controls is potentially allowing an employee to easily help themselves to the company’s assets. Without any internal controls, it is like leaving the car door unlocked with key in the ignition, hoping no one will steal the vehicle. Finding the right mix of internal controls and trust is vital to any business’s success. Internal controls are simply policies and procedures that are implemented to deter or prevent business related internal theft by employees. Most of these controls involve the accounting system and the related books and records of the business. When effective internal controls are in place, employees will usually have to collude with other employees to facilitate a theft. Collusion is where two or more employees work as accomplices or co-conspirators to steal money or property from the business, thereby defeating a control procedure.

  • They know you aren’t looking at the bank statements and invoices to be paid or that the check plate or blank check stock is not secured.
  • Distrustful workers will catch on and take advantage of situations that they shouldn’t.
  • Finding the right mix of internal controls and trust is vital to any business’s success.
  • Your employees are honest, you trust them and they would never steal from you.
  • Ensure that agency assets such as vehicles, cell phones, equipment, and other agency resources are used only for official business.
  • Learn about employee theft, and the most common examples of theft in a business.

These meetings can provide an opportunity for a short training program. Special sales and events require further preparation. For malls experiencing many crime incidents, the establishment of a police substation is helpful.

Business Types

Indirect costs can include damage to brand, a slowing of production, lower employee morale, investigative expenses, and an insurance premium hike after a claim. The mean loss per case was about $160,000 and each crime lasted about 18 months before detection. Ken Boyd is a co-founder of AccountingEd.com and owns St. Louis Test Preparation (AccountingAccidentally.com). He provides blogs, videos, and speaking services on accounting and finance.

internal controls to prevent theft

If you have grown too fast, you are probably not paying attention to these details. If employees perceive there is a chance to steal and they are under pressure, they may try it, particularly if they think they can get away with it.

Employee Collusion

Part-time work as a loss prevention agent is an excellent job while one is in college. The question is whether flexibility should be permitted. The dangers inherent in written policies and procedures, particularly procedures, are that they become inflexible and outdated and no longer viable. On the other hand, unless “flexibility” is managed with great care and caution, it is easy to abuse this capability, and regrettably abuse still tends to be a prerogative of some managers.

Unfortunately, few business owners realize how vulnerable they are to employee theft until it actually happens. Usually, weak or nonexistent internal controls provide the opportunity for employees to steal. While fraud often starts small, it tends to escalate over time.

The accountant performing the reconciliation should look carefully at the vendors who were paid. Did each vendor provide a legitimate product or service, and are there source documents for the transaction? You should insist that supporting documentation is attached to each check request. A great deal of fraud can occur through the cash account, and the cash account may have lots of transactions involving different people in your company. If everyone follows the steps in the manual, you’ll know exactly how a task is performed and who does the work.

Timely Bank Reconciliations

However, you do not need to accept this as a cost of doing business. According to Harvard Professor Tatiana Sandino, employees are less likely to steal when their wages are higher. In many employee thefts, there is a rationalization process such as “it’s only a few dollars, and I need it more than the big, greedy company.” It is becoming more important than ever that businesses review and bolster their anti-fraud controls. There are many ways that employees can unlawfully enrich themselves, so within those mechanisms, there have to be policies and procedures in place.

Internal Controls Can Prevent Employee Theft

One of the most frequently investigated incidents in the business environment is employee theft. Security industry in the United States from a historical perspective. It was once thought that most, if not all, of a company’s problems with theft were external in nature. Maintaining an accurate procedures manual helps clarify your business operations, and eliminates any confusion about who performs a certain task. A procedures manual is also a great training tool for new employees.

Many small businesses or franchise locations only have one or two employees at a time who are responsible for running the entire store. Keep risks of theft low by separating accounting from their duties. Allowing cash-handling employees access to your books gives them a chance to adjust sales records to cover up any theft. Our best practice for any company is to make sure the person paying and filing the bills isn’t the person signing the checks but especially in the case of managing the cash.

Sadly, the most trusted people in your business are the ones who have the opportunity to steal. Inadequate separation of duties, the absence of mandatory vacations, an organization constantly in crisis mode and rapid employee turnover can all create opportunities for theft. Fraud can’t be eliminated, but by taking steps to implement effective internal controls, you can reduce your risk of becoming a victim. Lapping fraud occurs when a check is stolen and then the next check that comes in is applied to the stolen account and so on. The bookkeeper cannot take a vacation or this type of fraud will be discovered.

•Background checks to identify and eliminate future internal problems. You can’t detect an inventory theft unless you confirm the inventory balance. Ideally, you should reconcile within 4-5 days of getting your bank statement. Since statements are now available online, you may be able to download your statement on the first day of the next month. The individual who committed the fraud may be located, but the time and effort to recover the money through criminal penalties or a civil suit may take years. The foreman created a company name and address that he controlled.

Beware of the employee you think is dedicated and never takes time off, they may be lapping your accounts receivable. This can take some time and is impractical for large companies, but it allows management a chance to give payroll a quick review. Commercial crime insurance is a great safety net to help any size business protect themselves from employee theft and fraud. But being vigilant isn’t enough in 2021 to keep yourself safe forever. As a manager or entrepreneur, we may find it difficult to allow our employees to take time off because of the unending mountains of work.

Smart Business spoke with Suponcic about how to reduce the risk of your business becoming a victim of fraud. Your employees are honest, you trust them and they would never steal from you. Perform monthly bank reconciliations – by someone who does not write checks. Simple rules concerning segregation of duties will help prevent theft. Compare checks to the company cash disbursements journal. Make certain that payees on checks match payees shown in the journal.

Confirm that the names and amounts on checks are consistent and believable with your company’s practice. On the surface, it might appear that a business failed because it could not compete in a highly competitive and evolving marketplace.

Many cases have involved family members, people who have known each other since childhood, or even the best man at your wedding. Best practices like separation of duties and setting up internal controls considerably helps to reduce your risk. Trust isn’t enough for preventing the risk of fraud– you need a separation of duties and internal controls. Sales are either stolen off the books or on the books. If sales are stolen off the books, the employee does not have to worry about making an entry into the accounting system to cover the theft. The inventory in this type of theft will reflect a sale, because the beer is consumed or the meal is still eaten.

Examine canceled checks to make sure vendors are recognized, expenditures are related to agency business, signatures are by authorized signers, and endorsements are appropriate. To determine the cause, rotate your employees through different shifts to see if the pattern follows a particular employee or shift. Sharing these metrics with employees can help provide a further deterrent to theft as they’ll know you’re monitoring for unusual activity. As always, the greater your transparency, the greater the likelihood your employees stay on track and avoid illegal acts. Set standardized portions for all food items and require that employees strictly adhere to them. Teach bartenders to pour according to specific measurements and make a public display of regular inventory.

Customers who aren’t paying attention may not notice the cash not going into the register, and if they do, they may not think anything is wrong. Dummies has always stood for taking on complex concepts and making them easy to understand.