According to the Association of Certified Fraud Examiners, asset misappropriation or theft is the most common type of fraud, accounting for 80% of all cases. Although all organizations can fall victim to fraud, small and mid-sized organizations are the most vulnerable according to “10 Steps to Avoid Business and Employee Fraud,” by Isaac M. O’Bannon. In general, employees of smaller organizations have a wider range of responsibilities and a greater amount of trust from their supervisors, leading to situations that can be taken advantage of. Organizations, big and small, must take precautions to limit the likelihood and severity of fraudulent activity. The following will lay out different types of asset misappropriation and strategies that all employers can take to protect their organization from this threat.
“How to prevent asset misappropriation,” by Ciaran Ryan, states that cash on hand and cash larceny schemes are the two most frequently occurring types of asset misappropriation respectively. Cash on hand schemes involve money that employees can readily access. Cash larceny is typically more devastating and involves the theft of cash that has already been recorded by the company.
Cash on hand schemes can be prevented through diligent supervision and limited access to funds. Cash on hand can include cash from registers, safes, and company bank accounts. Employees can take advantage of this available cash by claiming that they used it for legitimate company expenses, such as supplies. “How to prevent asset misappropriation” recommends keeping petty cash secure in a safe or lock-box monitored by cameras. The article also encourages companies to limit the amount of money that can be spent at a given time and to mandate receipts for all purchases. Employers should clearly be able to determine who is utilizing cash on hand and should be able to verify that it is being used strictly for business purposes.
As with cash on hand schemes, cash larceny can be prevented with extensive supervision of all money related tasks. No employee should become the sole person in charge of a financial responsibility. According to “How to prevent asset misappropriation,” it is important to segregate or rotate these responsibilities. For example, employees should take turns working the register and should each be provided a unique access code. Likewise, the accountant or bookkeeper should not be the same individual who receives and processes checks. It is also recommended that supervisors conduct random checks and cash counts so that nobody gets the impression that theft can easily go unnoticed. When there are many eyes watching financial activities, employees are less likely to commit fraud, let alone get away with it.
Of course, many strategies to combat asset misappropriation are universal to all types of fraud, if not most types of unethical behaviors in the workplace. “10 Steps to Avoid Business and Employee Fraud” discusses some of these universal strategies.
Nobody doubts the importance of knowing and trusting employees, but formal hiring processes may not be well emphasized in small organizations. Regardless of assumed familiarity and trust of a potential hire, a background check should always be conducted, especially if the new hire will be handling money. Implementing a thorough and formal hiring process may seem like a tedious task for a small organization but doing so can prevent a crisis down the line. Similarly, it is important to do your research before partnering with another business. Key information such as the business’ address, multiple contact methods and persons, and references can protect your organization from falling victim to unethical practices.
Employers must continuously and carefully monitor business bank and credit card activity. As the article points out, online banking makes it easy to check activity and to make sure that physical statements and records are accurate. Employers should be suspicious of missing checks, unknown payment recipients, and checks signed over to third parties, as these are signs of fraudulent activity. Employers of very small organizations must ensure that personal and business accounts and credit cards remain separate. Failing to do so can create confusion, detrimental accounting errors, and increased vulnerability to theft.
Finally, members at all levels of an organization should work together to combat misappropriation of assets. Employees should be trained on how to detect, prevent, and report potential cases of fraud. “10 Steps to Avoid Business and Employee Fraud” specifically recommends providing a known mechanism, such as a hotline, for employees to anonymously submit reports of suspicious activity. Employees should understand that their honesty and desire to protect their organization is valued, and that their concerns, reported in good faith, will not be used against them. Employing the strategies discussed above demonstrates a strong commitment to integrity in the workplace. Diligent supervision, separation of responsibilities, and thorough record keeping will not only help identify misappropriation of assets but will also serve as a deterrent to anyone considering committing fraud.