From check tampering to false reimbursement submissions, employee fraud is becoming prevalent at businesses of sizes, especially with the weak economic environment.

The most recent Global Fraud Study by the Association of Certified Fraud Examiners found that the median loss in companies caused by fraud cases was $160,000 in 2010, with small businesses being disproportionately victimized.  

While small business owners may not have the man power to employ a full-fledged fraud detection unit, there are procedures they can implement to curb employee fraud.

"Segregate accounting duties to the greatest extent possible," recommended Ken Stalcup, certified fraud examiner and certified public accountant at Somerset CPAs. "No one person should be responsible for an entire accounting cycle, meaning no one person should be allowed to approve vendor invoices, prepare checks to go back to that same vendor, sign the checks, post the checks to the general ledger and reconcile the bank account."

A system of checks and balances should also apply to inventory. "If you are a business that includes inventory, make sure your shipping and receiving departments are separate departments handled by separate employees,” advised Marc Bourne, vice president of Know It All Intelligence Group. He added that annual inventory counts should be done by a third-party vendor or an employee that is not responsible for the involved departments.

In addition to separating duties and instituting checks and balances, business owners should implement new policies and standards of practice in the workplace.

"We are big believers in mixing things up and adding a different flavor to policies and procedures," said Greg Jones, CEO of BookKeeping Express, a company that provides domestically-outsourced professional bookkeeping for small businesses. Jones recommended instituting new short-term policies like not only requiring receipts but requiring that clients sign-off on meal and entertainment-related expenses.

Business owners must create a workplace culture of honesty and values by setting an example.

"Human beings can rationalize anything,” said Joe Gerard, co-founder of i-Sight, software used to manage investigations of fraud or employee misconduct. “An owner who goes out for steak and three bottles of wine is implicitly creating a culture where this sort of behavior is perceived to be normal."

Monitoring behavior is key to detecting employees who may be susceptible to committing fraud. "If you notice sudden changes of your long-term employees, such as financial habits, like extreme spending, gambling, borrowing from co-workers, devotion or lack of devotion to work, there may be reason for concern," warned Bourne.

One of the hardest things for small business owners to do is admit that they are being taken advantage of by trusted employees. But, Jones of BookKeeping Express cautioned "the most tenured and knowledgeable in the organization are the ones who can get away with things."

The Global Fraud Study found that "frauds committed by owners or executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds."

In terms of detecting fraud, The Association of Certified Fraud Examiners recommended that "organizations implement hotlines to receive tips from both internal and external sources....[that] allow anonymity and confidentiality, and employees should be encouraged to report suspicious activity without fear of reprisal."

Business owners should strive to educate employees on the cost of fraud and how it can impact everyone’s financial future. Stalcup recalled cases in which fraud has shut down business and left people unemployed. "Fraud can damage a company's reputation.  Upfront and recurring training should help establish that there is zero tolerance with fraud and stealing."

If a business owner suspects that an employee is committing fraud, Gerard of i-Sight recommended that management rotate staff to look for inconsistencies and conduct a surprise audit, then have investigators review servers and computers for evidence.

"Get the person to take a holiday, if that isn't possible then investigate at night or on weekends," said Gerard. "You don't want the perpetrator to know you're onto them until you've gathered evidence."