Startups are prime targets for fraud. In 2010, 42% of fraud cases occurred in privately held companies, according to the Association of Fraud Examiners. The majority of those cases involved companies with fewer than 100 employees. To make matters worse, the average fraud continued on for a year and a half before being discovered.
Companies lost a median of $231,000 per case. That’s a lot of money for a start-up to lose.
Laws regarding fraud, embezzlement and theft vary from state to state, but often come with stiff penalties. In Minnesota, for example, someone convicted of embezzlement will face up to 20 years in jail and/or a maximum fine of $100,000 for items valued over $35,000.
While it’s impossible to protect your business entirely from employee fraud, theft and embezzlement, there are steps you can take to lower the risk.
1. Always Have Multiple Independent Parties Involved in Your Company’s Money Flow.
Having a system of checks and balances is key. The goal is to pair two unrelated team members on a financial job so that they can keep each other in check.
This strategy works in two ways. For starters, it lowers the temptation to engage in fraud because both parties know the other will see their bad behavior and report it. It also makes it so that two people would have to collude to keep the fraud a secret before any serious theft could occur.
If one person sets up the ACH payments for the period, then another should go in and approve the payments before they go out. The bookkeeper should never be the person who settles bank and credit card statements. And the person who reconciles the bank statements should not be allowed to modify or enter transactions in the company’s accounting system.
Essentially, one person handles the task and the other verifies it before things move forward.
2. Ensure That Your Financial System Has Permanent Footprints.
Ensuring that your financial system has permanent “footprints” that cannot be erased makes it more difficult to cover up theft. By establishing a clear footprint, it becomes easier to trace instances of fraud back to the offending party.
For example, you may keep permanent records of who altered your company’s accounting records.
Having this type of system in place reduces temptation to commit fraud and also increases the odds of fraud being discovered more quickly.
Make sure that your financial software allows for individual log-ins for team members who need access to the financial system. Also, make sure that the software tracks any changes and who made those changes.
3. Pay Attention to Employee Behavior.
If you notice changes in an employee’s behavior, don’t ignore it. Investigate. This is especially important for employees who have access to critical components of your operations or finances.
If an employee is routinely coming in extra-early or staying extra-late – after everyone else has left the building – this should be a red flag. It may be nothing (maybe the employee wants to catch up on work), or it could be something sinister.