Understanding and minimizing the chance of employee fraud

Do you ever wonder if any of your employees are capable of committing fraud? Trusted persons can become trust violators if three factors are present, often referred to as the “Fraud Triangle”:

  1. A secret need for cash. Whether it’s excessive debt or a gambling obsession, this need is typically socially unacceptable and therefore not satisfied by ordinary means.
  2. Justification. This involves the embezzler “reframing” his or her activity to become consistent with their self-image. This version of the events then becomes that he or she is doing something necessary, not wrong.
  3. Opportunity. If this component is not present, the other two are irrelevant. As the owner, you control the opportunity (or should control it), so this component becomes key for you.

Through screening activities like employment applications, references, interviews, background checks, drug testing and internet searches, there are plenty of ways you can try to minimize the risk of hiring a potential fraudster. However, nothing can totally eliminate the chance. As such, you must minimize the opportunity for a previously honest employee to compromise your systems by implementing controls, such as a separation of duties. This means that tasks must be separated so that an employee is neither able to perpetuate the fraud, nor cover it up.  An example of separation of duties is assigning different employees to open the mail and pay the bills.

If you’re not certain if you have sufficient segregation of duties in your office, ask a ShindelRock tax professional to conduct an analysis and recommend preventative changes to your operations to decrease your risk of embezzlement or fraud.