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Avoiding Employee Fraud

Avoiding Employee Fraud

Employee fraud can have far reaching consequences. It can impact your business’s finances and reputation and even your personal finances. That’s why it’s important to take steps to avoid employee fraud before it occurs.

Here are some suggestions:

Property And Data

  • Maintain an up-to-date list of equipment and supplies. Know what your business owns and make sure it stays where it belongs.
  • Lock all doors and restrict access to specific areas. Office employees do not need access to spare parts; shop-floor employees do not need access to financial documents.
  • Keep all sensitive information in locked drawers and cabinets. And limit access to those files on a "need to have access" basis.
  • Assign keys and electronic keys. Check periodically to make sure assigned keys have not been lost or stolen.
  • Reclaim all keys and badges when employees are terminated.
  • Perform regular data backups.
  • Password-protect all computers and programs. Use strong passwords, and change those passwords frequently.

Sensitive Information

  • Keep company files in restricted areas. Pay special attention to employee files containing personal information; your files likely contain addresses, Social Security numbers, bank-account numbers - data that can be used to steal another person's identity.
  • Keep customer files in restricted areas. Never let employees take files containing employee or customer information from those areas (especially to their homes). While working from home may make sense, segregate sensitive information from other data or information that can be safely used outside the office.
  • Dispose of sensitive data properly. Shred paper files and format hard drives. Create policies and procedures for properly disposing of any physical or electronic data and make sure those procedures are consistently followed.
  • Never put Social Security numbers on employee paychecks. Better yet, consider direct deposit.


  • Divide responsibilities. Never allow one employee to be responsible for all stages of a financial process chain. For example, have one employee create and make bank deposits, and have another employee reconcile bank statements. If you run a retail store, have a different employee reconcile cash registers at the end of the workday.
  • Require all purchases to be authorized by a select group of employees; do not grant blanket authority to all employees, even on a limited dollar-amount basis.
  • Set limits on purchase approval. Decide your "purchase pain" threshold, and limit purchases in excess of that amount to a select group of employees - or even to yourself.
  • Eliminate petty cash. Set up accounts with vendors and suppliers. Use purchase orders and invoices.
  • Sign all checks personally. Get rid of the "check stamp." If that sounds too time-consuming, require two signatures on checks over a pre-determined amount. That way you'll create a system of checks and balances to ensure no one person has the authority to make major purchases without authorization. Audit your checks on a regular basis to make sure no checks are missing.
  • Hand out paychecks personally. If you run a small business, you know all your employees. If your employees run in the hundreds, it could be easy for someone to create a "phantom" employee and pocket their "earnings." Handing out checks not only lets you keep track; it also lets you say "thank you" to your employees for their hard work.
  • Keep checks and financial documents in a safe place. Restrict access only to those who truly require access.
  • Shred sensitive information. Retail stores and restaurants take in massive amounts of customer information including credit card numbers. Shred all documents containing personal information including unused or unneeded credit card charge slips.
  • Keep original copies of all purchase orders and invoices. Have multiple people responsible for counting, ordering, and checking in inventory. Rotate duties. Create checks and balances.
  • Have an outside accountant review your books on a regular basis. A fresh set of eyes can catch discrepancies or problems you might otherwise miss. Audit payroll records on a regular basis. Match time cards, work hours, etc., with payroll records in case there are "phantom" employees or overstated work hours.
  • Know your vendors. Check in with them regularly. Stay in touch with what supplies and services your company purchases. Make it easy for vendors to let you know if they think fraudulent activity is taking place.
  • Perform credit and reference checks on all businesses to which you may extend credit. Credit and reference checks are your best defense against fraud - and against offering credit to companies or individuals who are not in a position to make good on the debt.
  • Run regular business credit checks. Identify misuse of company accounts or accounts created without your knowledge.
  • Immediately investigate if you suspect fraud.

Once you put safeguards in place, create formal policies detailing the repercussions and steps that will be taken if an employee is found or suspected of engaging in fraudulent activity. Make sure all employees are trained in your policies and fully understand potential disciplinary actions as well as the civil and criminal penalties they could face. (While that may feel like an awkward conversation to have with employees, don't worry; honest employees won't be offended while potentially dishonest employees may think twice.)

Completely eliminating employee fraud can be difficult, and protecting yourself against the worst-case scenario may prove vital. Be sure to check your business insurance policy to see if it covers employee fraud. That coverage may allow you to minimize the damage in the case that fraud does occur.

The information included on this website is designed for informational purposes only. It is not legal, tax, financial, or any other sort of advice; nor is it a substitute for such advice. The information on this site may not apply to your specific situation. We have tried to make sure the information is accurate, but it could be outdated or even inaccurate, in parts. It is the reader's responsibility to comply with any applicable local, state, or federal regulations, and to make their own decisions about how to operate their business. Nationwide Mutual Insurance Company, its affiliates, and their employees make no warranties about the information, no guarantee of results, and assume no liability in connection with the information provided.