How to spot fraud within your business—and what to do if you find it

by Darin Styles, CPA, CFE

Imagine this scenario: It’s been a busy day at your restaurant—so busy, in fact, that you’re expecting to see record sales when you close out the till at the end of the night. Instead, the till is short. You shake your head in disbelief. How could this be? You had one of your most trusted employees stationed at the register, so an error seems unlikely. Could this employee have pocketed some of—no! You quickly abandon the thought, embarrassed for thinking this person was capable of such an act.

As uncomfortable as it is to assume the worst, it’s something today’s business owners must do. Occupational fraud, which is fraud that happens in the workplace, can occur within any business, regardless of its size or industry. No organization is immune to it. This means you, as a business owner, must remain vigilant. And be skeptical of everyone. According to the Association of Certified Fraud Examiners (ACFE), the average fraud perpetrator’s record is void of prior fraud charges or convictions.

Here are a few tips for how to spot fraud within your business and what to do if you suspect it.

What are some common fraud schemes?

As business technology and processes become more sophisticated, it creates an opportunity for fraud schemes to become more sophisticated, too. A prime example of this is the onslaught of phishing emails that flood our email inboxes (or, ideally, junk folders) on a daily basis. While workplace fraudsters can and do harness technology for their gain, classic fraud schemes have not fallen by the wayside. In addition to stealing or cash skimming (as described in our restaurant scenario), these include employees writing checks to themselves, overpaying themselves, and being dishonest with travel and expense reimbursements.

Thankfully, most of these fraud schemes can be uncovered by a review of bank statements and cancelled check images. Strategically placed security cameras can be helpful in identifying instances of stealing or cash skimming. Other indicators of possible fraud include duplicate vendors on your accounts payable ledger. An example of this might be an entry for “Comcast” and another one for “Comcast Inc.” Transactions that occurred at odd times—such as midnight on a Saturday—could point to fraudulent activity, too.

What should you do if you suspect fraud?

First, take a deep breath. Being taken advantage of is never a pleasant feeling; it can be easy to let your emotions go into overdrive. Take care to avoid doing anything irrational. Sleep on it.

Once you’re feeling ready to tackle the situation, think about your end goals. Do you want to get enough evidence to fire the employee with cause, or do you want to take it as far as you can within the realm of the law?

Either way, here’s the good news: You don’t need to confront the employee right away; your first order of business should be to gather evidence of fraud. With the facts of the situation in hand, you can determine your next steps—and design better controls so it doesn’t happen again. Keep in mind that sometimes it’s beneficial to keep the fraud going, so you can gather a sufficient amount of evidence.

Whom should I call if I suspect fraud?

When it comes to gathering evidence of fraud, a CPA firm that specializes in forensic accounting can help. This type of firm can analyze data from your accounting records and bank statements to identify patterns that suggest fraud, and help you pinpoint the person who may be responsible.

If you wish to press charges against the employee, you’ll need to get an attorney involved. With knowledge of the ins and outs of employment law, your attorney can advise you on when—and how—to move forward with termination.

The more you know, the better.

The best way to stop fraud in its tracks is to know what’s going on in your business. And I know it sounds cynical to say this, but don’t be too trusting. Question everything. If you see something that looks suspicious, don’t assume it’s nothing to be concerned about. Taking a closer look never hurt anyone.

If you’re worried about fraud within your business or have questions about identifying instances of it, please contact us. We understand how stressful dealing with fraud can be, and we’re here to help you take steps toward resolving it.