Protecting Your Operation: Internal Fraud

Today, it is rare to pick up a newspaper, or turn on the TV or radio without finding some type of report on consumer fraud. However, in reality  –  the retailer is more often the victim of these crimes than the consumer.

Frauds against retailers can vary wildly, from fraudulent returns by shoplifters, credit card data theft by computer savvy outsiders, or from internal schemes carried out by trusted employees.

The primary focus of this article is on internal fraud and embezzlement and little gets the internal theft message out better than Hayes International’s latest retail theft survey reporting that one in every 28 employees is actually caught stealing.

Below are three actual examples of fraud and embezzlement in retail companies that were processed through the criminal court system last year:

  • A bookkeeper is now allegedly facing 9 counts of embezzlement, 18 counts of forgery and 18 counts of uttering a forged instrument for defrauding her retail employer out of $100,000.
  • A fraudster who was accused of embezzling more than $1.6 million from the company where she worked pleaded guilty to fraud and tax charges.
  • The owner of a retail establishment who lost over $100,000 to his longtime employee is glad the employee is going to jail. It was later discovered that this fraudster had a prior record for theft.

As exhibited by the above three cases, it is common for several years to elapse between the time the initial criminal act took place and the day of the scheme’s discovery; and more often than not, these cases are exposed strictly by accident or from information provided by a tipster, and not through the actions of an auditor, investigator, or accountant.

Prevention is Key
It is a well known “secret” that the solution to successfully preventing internal fraud and embezzlement is to get management involved. That’s right! No matter how trustworthy you perceive your staff – there is always the possibility of embezzlement in your operation. You can reduce your risk:

1) Recognize the Threat: Those in charge must recognize that internal fraud or embezzlement is a possibility.

2) Job Applicant Process: Controlling fraud and embezzlement starts at the initial hiring point. The risk can be reduced by conducting a thorough background and credit history check on those being appointed to critical-risk positions.

3) Multiple Tasking: One of the most effective measures to prevent acts of internal fraud or embezzlement is to not allow a single employee to be able to affect every stage of a critical work process.

4) Supervisory Oversight: Proper supervision is necessary to ensure that adequate internal controls are in place and enforced. Irregular and frequent spot-checks send a strong message of alertness and increase the chance of detecting fraud or embezzlement within your operation. $

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