Managing and Preventing Employee Fraud (Part 1 of 2)

Industries allocate billions of dollars each year to employee fraud, and no sector seems to be exempt from such frauds. It is vital to be aware of the potential for employee wrongdoings in your firm and to take steps to avoid them by isolating opportunities, and ensuring your internal controls are designed to deliver absolute maximum protection.

The most common types of employee fraud are:

  • Submitting fictitious invoices;
  • Paying personal expenses with firm funds;
  • Theft of receipts or cash on hand;
  • Payroll or expense compensation fraud; and
  • Altering or forging cheques.

These thefts often go undetected for periods between 8 and 36 months. Most often, employees who steal money work alone; and apparently, many of these employees have been with the firm for 3 years or longer.


The best way to deal with employee theft is to keep it from happening in the first place. Doing so requires implementing sound internal controls, which might include:

Risk Assessment
Examine your firm’s policies, procedures, and processes for any weaknesses within the system at intervals for safeguarding integrity and ethics. Conduct a risk assessment every 2 years, or when there is a significant system modification or staff change (such as a new billing clerk).

Separation of Employee Duties
Avoid having just one employee in charge of purchasing and approving or adding vendors. Although it may be difficult to assign duties among several employees in smaller firms, it is imperative that you implement internal controls that let employees know they are likely to be caught if they try to steal.

In addition, cheques with invoices ought to be given to the proper party for approval and sign off. Likewise, if you are using an electronic bill payment system, only owner-partners should be authorized to approve payments.

Monitoring Employee Behavior
Look for telltale signs that an employee is involved with or considering fraud. For instance, an employee who never goes on vacation or takes a day off may not want another employee to have access to his or her files. To combat this behavior, implement a requirement that all employees take scheduled vacations, and cross-train staff members on each other’s duties and responsibilities…….

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Supporting Article Research Sources: Ostrow, Reisin, Berk & Abrams Ltd.,