A: This is a vast topic covered by countless books and consultants, so let’s narrow it down to employee fraud and theft. Aside from the obvious—conducting regular inventory checks and book audits, reconciling cash daily, and personally reviewing financial statements each month—there are several actions you can take to protect yourself and your business.
1. Establish a code of conduct.
Did you know that American retail chain Walmart's employees are not allowed to accept a bottle of water or cup of coffee from a vendor at a meeting without paying for it? That’s one example of a code of conduct. It’s a statement that you will not tolerate unethical or illegal behavior toward anyone—customers, suppliers, employees or the company itself.
While you may not be as strict as Walmart, you should write and post a code of conduct that clearly spells out the rules for employees and the repercussions for not following them. Give the code to everyone upon hire, and periodically thereafter, and require written acknowledgement that they have read, understand and agree to comply with it.
Now look in the mirror. It’s one thing to demand honesty from your employees, but the code of conduct goes both ways. So you, as the enforcer of the code, need to follow it to the letter. If employees see you take home merchandise or use company property for personal reasons, they may follow your lead—or worse. If you treat employees with respect, compensate them appropriately and offer opportunities to advance their careers, they’ll have less motivation to steal or cheat.
2. Set up organizational checks and balances.
In a small business, one person may wear many hats. But the most dangerous multitasker is a solitary administrator/bookkeeper who opens the mail, handles deposits and payments and files transaction documents. No one person should control that many aspects of the business—it’s asking for trouble.
Also avoid assigning the same person to handle purchasing and vendor payments, or allowing the same employee to manage accounts payable and accounts receivable. If you’re a manufacturer or distributor, you should have separate people managing receiving, warehousing and shipping.
At the very least, set up an operation in which one person controls what comes in (cash, checks, merchandise, supplies) and another handles what goes out (payments, orders, finished products).
3. Institute policies and procedures.
Someone other than the bookkeeper should settle bank and credit card statements every month—and the person who reconciles the bank statements should not have the ability to enter or modify transactions in the accounting system.
Another way to rein in fraud is to have payroll prepared and authorized by HR but entered by accounting, then checked by management before the funds are sent to the payroll company.
Also, keep everything locked up that should be locked up, and enforce rigorous key control and computer-system access, especially for departing employees. Changing locks and passwords company-wide when someone leaves or is dismissed is not an overreaction—it’s smart.
4. Watch employees’ behavior.
If you notice changes in an employee’s behavior—files have been misplaced; they don’t want help with a project; they’re giving a customer excessive attention—look into it. The same goes for an employee with access to critical parts of the company’s operations or finances who never takes vacation time, or who routinely works early or late when no one else is around.
They’re not working those extra hours because they love their job. It might be because they don’t want anyone else to see what they’re doing. Insist that people use their vacation time and stick to regular business hours.
Pay attention to any blips in your operation, no matter how minor. At one manufacturing company for example, a customer sent back an expensive item for warranty repair. We couldn’t find any record of the sale. Upon further inquiry with the customer, it was discovered that the vice president of manufacturing and a foreman were building equipment inside the company, then shipping units out the back door along with their own company’s invoices. Hundreds of thousands were recovered in losses before the two were turned over to the police.
The key in all this is to trust your gut and recognize that no one knows your company as well as you do. If something doesn’t look or feel right, it’s probably not. By all means, investigate.
Copyright © 2015 Entrepreneur Media, Inc. All rights reserved.
This article originally appeared on Entrepreneur.com . Minor edits have been done by the Entrepreneur.com.ph editor.
Photos from Pixabay and Flickr (Hernan Pinera)