Placing trust in employees is part of doing business.   Employees may be entrusted with access to information, and even the money to operate the business.   In spite of that trust, some employees may seize the opportunity to rationalize a criminal act and defraud their employer.

Although most employees do not commit fraud on a grand scale, small fraudulent activities can add up to significant losses of money and trust in a business.   As an employer, understanding some of these schemes may help you avoid fraud in your business.   Here is a review of some of the more common schemes:

Sales Skimming: This takes place when the employee, handling a direct sale, takes the money but does not record the sale.   This kind of fraud can be hard to detect because there is no audit trail leading to the culprit.   Signs that this may be occurring include inventory shortages or lower-than-expected sales.

Fictitious Refunds: This situation occurs when an employee processes a fake return of merchandise and pockets the refund.   There are several tests that can detect this scheme, including: searching for large numbers of refunds which fall just below the amount necessary to involve management; sales and refunds that occur on the same day; refund transactions and inventory adjustments by the same employee; and refunds to a different credit card than the one for the original purchase.   You can also ocastionally contact customers who return merchandise and verify that the transactions were valid.

Payroll Fraud: When employees are in charge of reporting their own hours and need extra cash, reported hours can be inflated.   Look for excessive payroll amounts for an employee or department that are higher than expected or budgeted, inconsistent pay for salaried employees, or timecards that have unexplained alterations, errors or discrepancies.

Lapping Scheme: This involves accounts receivable and occurs when a payment from one customer is taken and is covered by subsequent collections of another customer.   The scheme takes a lot of effort to maintain, and may become too large of an amount to hide.   Some things to watch for are complaints from customers for payments not being posted to their account on time, resulting in collection calls or late notices.   A review of accounts being written off and questioning why may also help deter this scheme from occurring.

Theft of Inventory: Theft of inventory may show up as an inconsistency between what is recorded and a physical count. If the difference is small, it may go unnoticed, with an adjustment recorded for the discrepancy.  Thefts on a larger scale will show up as fictitious sales, which make it easy to get high value items out of the store or warehouse.   An accounts receivable is created, which may stay on the books longer.  To keep the fake sale from creating attention, the sale will need to be canceled, or written off as bad debt.  It is hard to catch one theft from occurring, but if the scheme continues, it will show up in regular reports.   Periodically, review reports such as sales by employee, returns by employee, or account write-offs to help uncover or deter this activity.

Employee Reimbursements:   Companies that reimburse employees for travel related expenses may find some employees taking advantage of this policy by submitting reimbursement requests that are not legitimate business expenses.   A regular review of reimbursement reports, receipts, and business purposes may deter fraudulent submissions or discover misclassified expenses. 

Placing trust in employees may be a part of doing business, but it should not be a cost.   Making a few small changes in what you examine and evaluate can provide you with peace of mind.   Even during these extraordinary economic times, the company has a better chance of not sustaining losses due to potential fraudulent acts of employees.