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Law & Policy: How to Guard Against Employee Fraud

March 14, 2013

Over the past year, the number of reported cases of employee fraud at REALTOR® associations has increased. Although this certainly has something to do with the economy, statistics reveal that small businesses like REALTOR® associations are prime targets for employee embezzlement. Businesses with fewer than 100 employees suffer nearly a third of the reported employee theft, with the fraud schemes typically lasting several years before detection. The median loss for a not-for-profit corporation victim of employee fraud is $90,000.*

Employee theft can occur in different ways but often involves employees who have access to the funds as well as the responsibility for monitoring them. The fraud usually starts small and grows over the years—ranging from monetary theft to misuse of company resources.

The most common type of fraud for REALTOR® associations involves using the company credit card for personal expenses. Unfortunately, in this scenario, even after the fraud has been detected, the accrued theft debt is usually too large for the perpetrator to repay. Association executives have been criminally prosecuted for their fraudulent actions, and at least one AE’s home served as reimbursement to the association from which she stole.

NAR has tools available to help REALTOR® associations prevent, identify, and address employee fraud. The most important tool is the “Fraud Prevention Toolkit” on REALTOR.org (REALTOR.org/ae/manage-your-association/fraud-prevention-toolkit), designed to help associations implement processes to avoid employee embezzlement. The NAR Professional Liability Insurance Program also provides REALTOR® associations with basic crime coverage of up to $10,000 per claim, subject to a $3,000 deductible, and the usual eligibility requirements.

Here are some steps you can take to protect your association from employee fraud, and navigate the insurance process, in the event that you find yourself a victim.

Fraud Prevention Plan

The first step in protecting your association against employee theft is creating a fraud policy. The fraud policy should clearly define what constitutes fraud and outline ethical business practices for employees. The scope of the policy should be broader than simple employee theft, covering misuse of company resources, gifts from vendors, and providing confidential information to third parties.

After defining fraud, the policy should describe “whistleblower” protections. Most fraud is detected by other employees, and so encouraging employees who believe fraud is occurring to come forward is an essential part of any fraud program.

Next, the policy will need to describe the process for reporting fraud. This could include designating certain individuals as fraud contacts, or referring employees to another mechanism, such as a dedicated voicemail or e-mail box. Many large companies employ a 24-hour tip hotline, but this may not be a practical solution for REALTOR® associations.

Finally, the policy should describe the investigative process, including who will lead the investigation and what steps are involved.

Once the association has a fraud policy in place, they’ll need to clearly communicate it to all employees, making sure they understand the importance of fraud prevention.

Other Important Safeguards

Segregating duties is a vital safeguard in small associations, where employees are performing multiple roles. As previously noted, the most common type of fraud within a small organization occurs when a person has both access to funds and the responsibility for monitoring the accounts. Separating the duties between employees is the most obvious way to prevent fraud.

An additional safeguard is to require two signatures for expenditures above a certain threshold. Expenditures should be monitored, and all irregularities—such as checks made out to unknown suppliers or to cash—should be investigated.

Finally, conduct an annual review of the association’s finances or a third party to provide an annual audit. This could be undertaken annually by a committee of the association or the association’s treasurer, with any irregularities being investigated further. Hiring a CPA to conduct the audit is another option for the association.

Secure Insurance Coverage

If an association suffers a loss from employee fraud, the NAR insurance program for REALTOR® associations offers basic crime coverage to associations. Crime claims have some special reporting requirements, such as reporting all criminal acts to the police. Associations can also purchase extra coverage to increase the limits. For more information about NAR’s insurance program for associations, visit REALTOR.org/programs/professional-liability-insurance-program.

Small not-for-profits, such as REALTOR® associations, are especially susceptible to employee theft. By implementing a fraud policy and adopting other safeguards, associations can help prevent, identify, and address embezzlement from within.

* Source: Association of Certified Fraud Examiners survey

6 Tips for Preventing Employee Theft and Fraud in the Workplace

1. Use pre-employment background checks wisely.

Basic pre-employment background checks are a good business practice for any employer, especially for those employees who will be handling cash or have access to sensitive customer or financial data. Check with your local Equal Employment Opportunity Commission office for the laws in your area that govern the types of information that you can consult as part of a pre-employment check.

2. Check candidate references.

It’s always a good practice to check references, particularly those of former employers or supervisors.

3. Communicate Conduct Guidelines.

Your employee code of ethics and conduct should be not only documented and agreed to by all new employees but reviewed and initialed by existing employees.

4. Don’t be afraid to audit.

Auditing always has a “Big Brother” feel, and in a small business environment this is especially true. However, conducting regular audits can be a significant deterrent to fraud or criminal activity.

5. Recognize the signs.

Studies show that some of the potential red flags to look out for include:

  • Not taking vacations—many violations are discovered while the perpetrator is on vacation
  • Being overly protective or exclusive about one’s work space.
  • Preferring to work after hours or take work home.
  • Unexpected change in behavior.
  • Financial records sometimes disappearing.

6. Set the right management tone.

One of the best techniques for preventing and combating employee theft or fraud is to create and communicate a business climate that shows that you take it seriously and trust your instincts.

Adapted from the U.S. Small Business Administration online community pages.

Finley Maxson is an association counsel with the National Association of REALTORS® in Chicago. He can be reached at fmaxson@realtors.org.