One of the most common types of fraud is when employees steal from their employer. This is called internal fraud, and it can wreak havoc on your business. For example, a typical internal fraud incident lasts 12 months before employers detect something is wrong, according to a recent report from the Association of Certified Fraud Examiners (ACFE).

Even more concerning: The crimes result in median losses of $117,000 per case. In fact, fraud examiners estimate that organizations lose 5% of their revenue each year. The good news is that even though internal fraud is common, there are practical ways to reduce your risks.

Proper policies, healthy work cultures, and internal controls can help prevent fraud before it ever starts. Follow these five tips to ensure that your employees are working for the good of your company—and not against it: 

1. Understand the problem

Internal fraud isn’t limited to only very large or very small companies. Instead, it happens in businesses of all sizes and across all industries. The most common type of fraud is asset misappropriation, which accounts for 85% of all internal fraud cases and might include activities such as stealing cash or billing and payroll schemes. Financial statement fraud is less common, accounting for about 9% of all internal cases, though it typically leads to significantly higher losses. It’s important to note that the employees committing the crimes also span positions and departments. Company owners, for instance, account for 23% of all internal fraud. However, half of internal fraud cases originate in four departments: Sales, Accounting, Operations, and Executive Management. As you determine how to prevent fraud, consider that half of all fraud cases investigated by the ACFE occurred because of a lack of internal controls. And with the other half, employees committing fraud overrode the internal controls.

2. Establish a strong corporate culture.

One of the best ways to reduce the risk of internal fraud is to cultivate a culture that encourages transparency and honesty. You can start by brainstorming your organizational values and digging into why those values are important to your company. For example, your organization might value accountability and foster an environment that enables people to admit their mistakes and recover from them. Or you might call out responsibility and the importance of everyone’s contribution to the company’s success. You can relay these values — and their meaning — to new and existing employees. As you evaluate culture, also review the role that communication plays. Encourage open communication between employees, their managers, and top executives. And ensure that employees know they won’t be penalized for speaking up if they notice something concerning. 

3. Implement internal controls.

Internal controls are policies and procedures designed to protect company assets and prevent fraud. They create a framework that makes it difficult for employees to misappropriate assets or commit fraud without someone noticing the behavior. For example, some common internal controls include: 

• Separating employee duties, especially with regard to company financials. This ensures that no single employee has complete control over a business line or financial function.
• Limiting employee access to financial systems and funds. In a digital era, companies often establish and monitor employee accounts and passwords to track who accesses specific systems.
• Conducting regular audits and financial reviews to spot any irregularities. These independent assessments can uncover fraud and provide tips for areas of potential weakness.

4. Recognize the warning signs.

Employees committing fraud often leave a trail of evidence. If you know what you’re looking for, you can spot potential fraud faster and reduce losses. So, what are some red flags that could indicate fraud? Keep an eye out for discrepancies in records, such as numbers that don’t match up between accounts. The same goes for financial irregularities. This could be reports of sales or shipments from one customer suddenly dropping off or rapidly increasing. Sudden changes in employee personal and professional behaviors can also indicate potential fraud. Be mindful of employees who appear suddenly wealthy or—vice versa—are in extreme financial distress. Finally, incorporate background checks as part of your hiring process. This can help prevent known bad actors from entering your organization.

5. Encourage organizational vigilance.

While a fraction of employees may pose a risk to your company, the rest can help you protect it. You can encourage vigilance against fraud by educating your employees about the risk and what to do if they spot suspicious activity. For example, establish easy ways for employees to provide anonymous tips about potential fraud. According to the ACFE report, 42% of fraud cases were uncovered due to tips, and half of those tips came from other employees. Once you’ve created fraud training, offer and update it often.

Internal fraud methods continue to evolve, and it’s impossible to eliminate the risk completely. But you can reduce it by ensuring your employees understand the issue, can identify red flags, and know their reporting options. 

To learn more about how to protect your organization from fraud, head over to valley.com/security to learn more.