Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans.
We always want to think the best of people, especially our colleagues and employees. Thankfully, in most circumstances, we work with people who strive to do the right thing for our business and its clients. Unfortunately, sometimes we encounter employees who carelessly waste company money or commit fraud that costs a business not only money, but its reputation and future if the problem is not discovered immediately.
According to the Association of Certified Fraud Examiners, a "typical organization loses 5% of revenues each year to fraud," with small companies losing greater-than-average amounts. Here are some tips that will ensure employees at your business stay on the straight and narrow, helping minimize your company's chances of falling victim to employee fraud and unnecessary, wasteful expenses.
1. Make sure all company policies are documented and understood by employees
This is easier said than done, since business and procedural changes will require new and revised policies continually. But, to act upon policy violations efficiently and legally, you must be able to prove a policy existed and employees were notified of it. Up-to-date, written, and acknowledged policies are crucial to all areas of business, and every tip below relies on the existence of clear policies.
2. Impose limits on employee travel expenses
Companies without set limits on employee travel expenses usually learn quickly that limits are necessary to prevent a select few employees from charging exorbitant dinners and staying in luxurious suites. Before any employee travels for the company, make sure she/he has a clear understanding of what items/services the company allows her/him to charge and daily limits on meals and hotels. By setting these limits, you're taking a huge step to minimize wasteful expenses.
3. Adhere to attendance and overtime rules
If you don't already have an electronic attendance system, consider purchasing one. Relying on employees to report their own comings and goings is an error-prone process at best, with the potential for outright fraud.
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Written records can be "fudged" easily, and even correct records written in poor penmanship can cause unintentional errors in payroll.
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Written time sheets turned in at the end of a week or, worse, at the end of a two-week pay period are likely to contain times the employee was guessing at, having forgotten exact arrival and departure times.
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An employee who makes $15 an hour and records being at work for just half an hour per week more than he actually worked would receive an unearned bonus of almost $400 in a single year.
Rules relating to when employees are authorized to take overtime are critical to avoiding nasty payroll surprises. Assuming your business does not authorize overtime pay, make sure employees know they must alert a manager when they approach 40 hours in a week. If business conditions require extra hours at critical times, be clear about how you'll limit the expense and when staff will return to normal hourly limits.
4. Eliminate opportunities for fraud
While you may know your employees well and think fraud is an impossibility, don't be lulled into a false sense of security. If an opportunity to commit fraud exists, eventually somebody will take it. Most employees who commit embezzlement and other internal fraud are long-standing employees who appear highly committed to the business. Here are some ways you can safeguard your business against employees who may become tempted to defraud it.
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Monitor warning signs. Employees considering or committing fraud often display some of these characteristics:
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A lifestyle that requires spending above their income level
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Working long hours, without taking sick or vacation days
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Resistance to sharing or relinquishing control over work duties
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Close relationships with vendors
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Enforce mandatory vacations. Employees engaging in fraud cannot cover up their activities when they're not at work, so they often refuse to take vacation time. This is why many large financial institutions require mandatory "compliance leave," where all employees in financial positions must take two continuous weeks of vacation (or one week plus the weekends before and after) at some point every year. Vacationing employees are banned from accessing company email, systems, and work devices since, according to Ernst & Young, "incidents of fraud, such as accounts manipulation . . . are often uncovered when colleagues take over for vacationing coworkers and notice something is wrong." Keep records of your employees' vacation and make sure all employees take disconnected time off yearly. Knowing they must leave their activities and accounts open to inspection every year can be enough to deter potential fraudsters.
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Create "maker/checker" controls. For duties like accounts payable and others with potential for employee fraud, make sure a checks and balances system exists where multiple employees are involved in creating and approving transactions. Operations where one person is responsible for multiple actions in a chain provide a perfect opportunity for fraud.
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Implement job rotations. Much like having employees take over for others during vacations, rotating employees on different jobs deters fraud and brings any existing fraud to light more quickly. Rotating the employees who deal with specific vendors will make employees and vendors far less likely to engage in fraudulent activities together.
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Conduct surprise audits. Aside from the obvious benefit of catching any fraudulent activity, the knowledge that your company brings in auditors for surprise inspections will make employees more fearful of engaging in fraud.
Remember that the most important step to preventing waste and fraud, as well as a necessary step for punishing fraudulent activity, is clearly written policies directing company tasks and activities. While creating and documenting proper procedures is time intensive and can be a pain, procedures help prevent employees from costing your company money, both inadvertently and intentionally. Also, it's always easier and cheaper to set up proper fraud prevention techniques than to catch and correct fraud after it's happened.
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