A Small Firm’s Worst Nightmare

Small law firms, and other privately held companies, face another threat in this struggling economy: rising employee fraud. According to James Ratley, president of the Association of Certified Fraud Examiners, employee fraud – from billing and expense fraud to skimming and check tampering – tends to rise during tough economic times.

In a recent interview with the Wall Street Journal, Ratley says employee fraud tends to rise during tough economic times, when workers are feeling financial pressure in their personal lives. And small companies are especially vulnerable because they often lack stringent internal controls to prevent fraud. Sometimes, management at affected companies attribute lost funds to lower revenue … never even suspecting foul play.

“A lot of times a small business will close its doors,” says Ratley, “And never know they were defrauded; that the problem wasn’t the declining economy but that (one or more) employees were stealing.”

In a recent two-year survey of more than 300 small companies, the six employee fraud schemes centered most frequently on billing, check tampering, skimming, expense reimbursement, payroll, and fraudulent financial statements.

Business owners were advised to be alert to employees who seem to live a lifestyle beyond their means, and who guarded access to the firm’s accounting software. In addition, business owners should review every canceled check (including the signature on the back), and they should review bank statements each month and check for unusual transfers.