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Fraud in the Workplace

Fraud in the workplace impacts nearly every company at one time or another. The Association of Certified Fraud Examiners reports that the typical company loses 5% of its revenues each year to fraud, with the median loss caused by fraud in the workplace at $140,000 and more than one-fifth of those cases causing losses of greater than $1,000,000. Generally, misappropriating assets is the most common way an employee will steal from your company. Fraudulent disbursements, cash diversion, fake vendors, inflated costs for purchases and payroll schemes are also very common in the workplace. You should ask yourself what policies your company has in place to detect and report fraud, whether those policies are being followed, and what to do when an employee is caught stealing. Identifying an employee who is stealing from the company is a difficult process. Red flags can include failure or delayed reconciliation of bank accounts, missing records, unrecorded transactions, suspect journal entries such as round numbers, disorganized operations, cash transactions, unexplained cash discrepancies, sub-ledgers that do not reconcile with the general ledger, substantial write-offs of accounts receivable, voided, destroyed or missing checks, complaints from customers about billing, and complaints from vendors about payment. If you are looking for the type of employee who may steal from the company, employees who are in a position of financial control that never take a vacation (and therefore may be involved in a kite) or regularly gamble at a casino (thus providing the ability to launder stolen funds) are potential indicators. Internal controls can go a long way in preventing workplace fraud. Of most importance is dividing responsibilities and maintaining dual control over accounts. For example, your policy and practice should be to divide the responsibilities of making check deposits and writing checks for the company. You may consider rotating these duties if you have enough staff.

Other practical measures include maintaining all checks and deposit slips in a locked or controlled environment, reviewing all financial statements within the time period required by your bank to contest an unauthorized charge, conducting periodic audits, reviewing financial statements at least on a quarterly basis, requiring supporting documents before signing checks or authorizing a financial transaction, avoiding the use of stamps for making or endorsing checks, limiting petty cash, and keeping your bank updated with respect to who has authority to make checks and who will deposit checks. Of course, your company’s internal controls and practices must be tailored to fit the size of your company, and should be regularly reevaluated based on your growth and experience. So what do you do when you discover or suspect that an employee is stealing from the company? Certainly the company’s internal policy should be consulted. If you don’t have one, get one. In practice, you should remember that discipline or termination of an employee for theft could lead to a claim against the company if it is later determined that no theft occurred. Such claims could include defamation, wrongful discharge, discrimination, intentional infliction of emotion distress false imprisonment and So, be sure to conduct an investigation – one that follows company policy – before you take any action against the employee. Typical policies should include a disclosure that the company may investigate the employee, what the company believes constitutes theft, and what the company will do if it determines that a theft occurred. While conducting the investigation, the company should be sure to keep the entire investigation confidential and remove the employee from a position where evidence could be destroyed or altered (e.g., paid administrative leave, suspended leave or transfer to another position). Finally, the company should consider whether the theft warrants discipline, termination, or informing the authorities.