Cal Johnston, owner of a US Midwest engineering firm, was confused. His accountant was telling him that that he was losing money, possibly facing bankruptcy, but he knew that business had been great and he had a good handle on costs. There had to be something going on.

There was. An internal investigation revealed that Susan Strong, Cal’s longtime and most trusted employee in the finance department, had been siphoning off funds for the past three years, disguising them as supplier payments. Cal was shocked. Then he was angry… at himself. He had fallen for some of the biggest myths about internal fraud.

My Employees are Honest and Won’t Commit Fraud

Everyone wants to believe their employees would never commit fraud, but the numbers tell a different story. According to the ACFE, organizations lose about five percent of their profits to internal theft by employees. And often it’s the most trusted employees who do the most damage.

Sometimes employees who exceed performance expectations or have a long tenure with a company are not held to the same accountability as everyone else. Employees who aren’t held accountable, under the right circumstances, may be tempted to commit fraud.

Background Checks Protect Me from Fraud

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According to the ACFE’s 2012 Report to the Nations, most occupational fraudsters are first-time offenders with clean employment histories. About 87 per cent of them had never been charged or convicted of a fraud-related offense, and 84 per cent had never been punished or terminated by an employer for fraud-related conduct.

In these cases, you can do thorough background checks, call references, and may still not find out that the person you are hiring is likely to commit fraud.

Auditors will Find Fraud

Auditors find only about 20 per cent of the frauds detected. Most fraud is discovered by accident or is revealed through employee tips. And according to the ACFE, it takes an average of 18 months for employers to detect internal fraud.

There are better ways to detect fraud, including knowing how to spot red flags and listening to your employees, who are often more aware of what’s going on in a company than the employer is. Watch for clues. Is an employee living beyond his or her means?

An Ounce of Prevention

Despite the dim picture painted above, all is not lost. There are many ways companies can effectively lower their risk of fraud.

1. Implement a code of ethics and demonstrate a commitment to upholding it from the top of the organization.
2. Require everyone in the organization to take their vacation time, as fraudsters may be reluctant to allow someone else to take over their duties for fear of discovery.
3. Perform unscheduled surprise audits of the company’s financial records.
4. Ensure accounting duties, such as adding new payees and signing checks, are separated among two or more employees.
5. Provide an anonymous mechanism for employees to report concerns and demonstrate a commitment to following up.
6. Apply the same standard of accountability to everyone in the company, including long-term employees and top performers.
7. Conduct background checks. Just because 87 per cent of fraudsters are first-time offenders doesn’t mean you should let the other 13 per cent into your company.