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Preventing Employee Fraud

By November 20, 2013 No Comments
Preventing Employee Fraud

How to prevent your employees from stealingSmall businesses are like families. People work closely together. Everyone knows everyone. Bosses and employees may even be friends and socialise outside of work. Which can make it all the more devastating when a company is defrauded by a member of staff. Not to mention the financial impact of fraud on a small operation.

Of course, most employees are entirely trustworthy, but evidence suggests that during tougher times fraud increases, and more instances of employee dishonesty come to light as companies check their books and processes more closely. And the run-up to Christmas can be a particular period of criminal activity, as desperate workers seek extra money to pay for festive bills or take advantage of the quiet seasonal break to commit fraud or cover up their efforts.

The UK loses a massive £85.3 billion a year due to fraudulent activity, according to recent data from accountant BDO. Much of this is accounted for by larger corporate frauds, but petty theft in smaller companies also increases when people feel the financial pinch. Michael Shuck, operations director of the Association of Business Crime Partnerships, a body dedicated to reducing crime on businesses, has estimated that a third of losses can be attributed to staff theft and fraud. Some industries are particularly badly affected, with the Centre for Retail Research estimating that British retailers lose about £1.5 billion a year to staff theft.

Cifas, the UK’s private fraud prevention service, has analysed staff fraud and found that common forms are misappropriating funds, stealing cheques, inflating expenses claims, and forging signatures. The BDO study also found that procurement and payroll were areas that were ripe for exploitation, for example, with goods or services not being supplied after payment’s taken or companies being overcharged. Much fraud in small businesses is opportunistic, but some scams are highly sophisticated and take place over many years. In smaller firms, there are usually one or two trusted individuals who are given a lot of responsibility and if they choose to abuse that trust it can take a while to come to light. Then, there is the threat of infiltration by organised criminals, which is increasingly commonplace, though not the main security threat to small companies. But all of these potential assaults mean that company bosses should be aware of any possible threats.

There are some classic signs of internal fraudulent behaviour. These include:

  • An employee being reluctant to take holiday for fear that their theft will be discovered. This can be avoided by insisting that all members of staff take at least a week or two off successively each year.
  • If someone is erratic in their reporting to management, they may just be inefficient or they could be trying to cover their tracks. Insist on processes being up-to-date and don’t take any excuses for tardy behaviour.
  • When important information suddenly goes missing there may be reason for concern – it certainly merits investigation. To avoid a worker claiming that vital files or data have been lost, make sure your storage systems are properly maintained and overseen by more than one person.
  • Quite simply, if a member of staff suddenly appears to have a lot more money than previously, if they’re taking expensive holidays or driving a flashy car, alarm bells may ring. Fraudsters may be cunning, but they’re not always smart when it comes to spending their ill-gotten gains.

Simon Dukes, CIFAS’s chief executive, says: “The cost of fraud is much more far-reaching than a fraud loss figure on the bottom line caused by one rogue individual. With total costs nearly quadrupling the initial amount lost on smaller frauds, this is a warning to all organisations that they risk making themselves a sitting target if they do not recognise that prevention is far less costly than cure.”

But, how can companies prevent fraud and theft?

  • The Metropolitan Police advises businesses to be vigilant in checking new employees’ references to prevent hiring a rogue character.
  • Basic checks and balances are essential in day-to-day business, including having two sign-offs on payments past a certain monetary level.
  • Create a rigorous anti-fraud culture that promotes honesty and transparency. Clearly written policies should be in place outlining the company’s attitude and response to any incidents of theft or fraud. Enforcing these policies is very important to reinforce the message that dishonesty will not be tolerated.
  • Staff should be trained to be vigilant and aware of the potential signs of staff fraud, plus they must know the appropriate reporting procedure if their suspicions are raised.
  • Fraud isn’t just a question of people being caught with their hands in the till. With more businesses dependant on technology than ever before, the risk of data theft is a real one. Identify who needs to use what data and limit access to sensitive information, such as customer payment details, only to those who really need it.

Many business owners are worried about the potential reputational damage of revealing they’ve been duped or they aren’t confident of an adequate police response. The Federation of Small Businesses calculates that one in four SMEs in London don’t report crime because they think it won’t be taken seriously. But a spokesman from the British Chambers of Commerce insists reporting fraud to the police is essential. He comments: “If businesses don’t report everything to the authorities, particularly small thefts by staff, they end up absorbing the sums lost, which soon mounts up for a smaller firm.”

While fraud is potentially very damaging to small firms, you don’t want to create a culture of suspicion and mistrust. The Chartered Institute of Personnel and Development has conducted research that suggests employees who are too closely monitored have a more negative attitude towards work and are more likely to suffer stress. It’s good to remember that most workers are law-abiding. Nurture this type of culture in your organisation and you’ll have employees who will not only be able to recognise wrongdoing when it occurs, but will feel compelled to report it. This honest majority are one of the strongest security measures a business can have.
Image courtesy of chanpipat /

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