Fraud is hardly an infrequent workplace occurrence. But wholesalers and distributors may find detecting fraud more difficult as their volume of inventory-related transactions increases. This article explains how to screen prospective employees and other preventive measures to protect companies against fraud.

Fraud is hardly an infrequent workplace occurrence. The Association of Certified Fraud Examiners estimates that companies lose an average 6% of annual revenue to employee fraud. The most costly abuses affect businesses with fewer than 100 employees.

Embezzlement may seem the most obvious form of fraud. But beware of other common schemes -- including phony checks; altered accounts receivable; and doctored purchasing, payroll and personal expense reports. Wholesalers and distributors may find detecting fraud difficult because their volume of inventory-related transactions frequently increases.

It Pays To Screen

Your business may indeed suffer financial losses from fraud, but you also could become liable for employees’ crimes. An employee-screening program can help you detect and stop potential fraudsters before they wreak havoc on your wholesale or distribution business.

A comprehensive program focuses on pre- and post-employment screening. It can prevent fraud and restore profitability lost to fraud. Screening prevents you from hiring dishonest employees and keeps current employees accountable.

Flush Out Fraudsters Before Hiring

Fraudsters often go to great lengths to protect themselves, even fabricating previous employment history and education. To flush them out:

• Review all application information with candidates, ask detailed questions to reveal gaps in employment history and education, and explore red flags,
• Conduct complete reference checks -- including criminal, education, employment, residence, credit, Social Security, driving record, and professional affiliation and license,
• Ask schools -- not the applicant -- to send transcripts, and
• Administer psychological and behavioral testing for management positions.

When conducting background checks, you must comply with federal, state and local laws. For instance, the 1997 Fair Credit Reporting Act requires companies to obtain written permission from prospects before checking on certain personal information. You also must inform prospects that you’ll use this information to make a hiring decision. Otherwise, you may face charges of defamation, privacy invasion, or negligent hiring or retention practices.

Post-Employment Measures

After you hire employees you must still maintain internal controls. To prevent fraud in your wholesale business’s daily operations:

• Involve the human resources department in the hiring, disciplinary and termination process,
• Conduct periodic performance checks,
• Get to know your employees -- this will help you detect sudden behavior changes,
• Limit access to financial records and assets,
• Segregate duties throughout the accounting process, and
• Standardize procedures for documenting and maintaining financial records and assets -- including authorization of disbursements.

Also consider establishing an official fraud policy -- including a training program -- that addresses how employees can report fraud. And ask your financial advisor to regularly conduct surprise audits to keep employees on their toes. Your bank may also offer additional fraud protection products and services.

Protect Yourself

Employee fraud can devastate your wholesale or distribution business. Fortunately, we can help -- please call us today. And for more information on hiring the right people for your business, fax back page 6 for our complimentary Management Insights report, “How To Make a Great Catch: Implementing an Effective Hiring Process.”

Do You Know the Signs?

Some behaviors may indicate a tendency to commit fraud. Can you recognize this conduct among your employees? Look carefully for workers who:

• Suffer from constant personal financial problems,
• Have a history of job hopping,
• Exhibit unethical behavior -- such as lying,
• Demonstrate drastic mood swings,
• Seem arrogant or highly self-important,
• Have substance abuse, gambling or marital problems,
• Live beyond their known financial means,
• Delegate responsibility unwillingly,
• Appear overly capable and devoted, or
• Refuse to take vacations.

Joseph R. Barbagallo, CPA, CVA, CFFA, CFD, CFS, CFI, ABV has over thirty years of experience providing forensic accounting and litigation support services. Joe can be reached at jbarbagallo@marg.com.