Warning Signs Of Fraudulent Behavior In Your Company

For small business owners, trust can be the foundation for success.
Trusted relationships with customers, partners, employers and investors are vital to growth and even survival – but, unfortunately, trust can easily be broken.
According to two experts from accounting firm Gorfine, Schiller & Gardyn, it's often very easy to overlook obvious signs that an employee is engaging in fraudulent behavior. From stealing petty cash to putting family members on payroll, there’s a wide-range of bad behaviors that need to be vigilantly monitored.
The accounting firm’s two experts, Laura Shuman and Mike Schiller, the key is knowing the red flags. These include simple greed, gambling problems, living beyond their means, or driving an expensive car. Small business owners also need to know what motivates an employee to steal from a company. For instance, a disgruntled employee looking to get even with a company.
It is important to note that bad apple employees are good at covering their tracks, rarely take vacations, and can even be the ones you least expect.
How to Prevent Fraud: Benjamin Franklin once said that “an ounce of prevention is worth a pound of a cure,” which certainly resonates well when it comes to employee fraud prevention.
The most significant prevention strategy is to create a culture where employees know that they would be caught in the act. Company owners can instill a healthy amount of fear by letting all employees know that there are controls in place. This should include the ongoing review of expense reports and credit card statements, as well as making sure employees know who controls the signature stamps for checks.
It's also very important for an ethical culture to start with leadership. Employees often mirror the behaviors of management, and can quickly notice the good and bad habits that are shown by leadership teams.
As previously highlighted, nefarious employees often don’t take vacations for fear of someone taking over their duties discovering their fraudulent behavior. As such, making vacations mandatory can go a long way in preventing bad behaviors.
Finally, always ask questions – especially if something doesn’t look right.  If an employee gets defensive when questioned about unchecked spending or expenses, this is also an immediate red flag.
What to Do When Fraudulent Behavior is Discovered: The first reaction is usually to call law enforcement. But, before taking this step, you need to build up your case and gather all of the relevant evidence.  In addition, law enforcement is not going to do a forensic investigation and go searching for the evidence.
It's also important to note that suspected fraudulent behavior could have been human error by a bookkeeper who wears many hats for a small company. You want to avoid a scenario where a long-term employee has to face false charges.
As such, the first thing you should do is consult with a Certified Fraud Examiner (CFE) who can dive into the records and uncover all of the evidence. This professional can take statements and write reports to help make the decision as to whether the situation should be handled criminally or civilly.
In addition, it costs much less to bring in a CFE who specializes in forensic accounting early on – instead of reacting after the fact. This includes putting the proper controls into place, which can either prevent future fraudulent activity or catch bad actions that have already occurred.
How to Recover Your Losses: Depending on the scope and size of the fraud, it’s often easiest to develop a restitution payment arrangement with the employee – especially if it’s for the purchase of smaller, personal items. 
For large-scale fraud, this will be handled through the legal system, and could result in a lien on the employee’s house, garnishment of their wages and bank accounts, and even potential jail time.
Unfortunately, the reality is that many of the losses will never be recovered, which points to the need for strong fraud prevention strategies. However, always pursue the recovery of your losses – even if you get nothing back – otherwise you are setting the precedent for other employees to steal from you.
Employee fraud can happen at virtually any small business. Being vigilant in finding these bad behavior red flags, and knowing how to prevent fraud overall, can go a long way in protecting your business from any unnecessary losses.
About the authors:

Laura Shuman, CPA, is a Manager of Small Business at Gorfine, Schiller & Gardyn.
Mike Schiller, CPA and CFE, is a Supervisor of Audit and Accounting at Gorfine, Schiller & Gardyn.