In our blog post on low-tech credit card abuse, we described how small businesses are highly vulnerable to people who seize an opportunity to commit frauds of convenience. But beyond making personal purchases on the company card or misrepresenting bills on financial statements, potential fraudsters can find even simpler ways to siphon funds from their employer.

Environments of Conflicting Interest

While the person committing fraud is ultimately responsible for his or her own actions, their employer holds powerful influence by creating an environment in which fraud is easy to commit.

One subtle but tangible conflict of interest we’ve seen is when employers distribute company credit cards with rewards points/programs to their employees. Though with the right management, this situation can be controlled and employees held accountable for their behavior, it encourages people to use company-earned rewards for personal use.

In this environment, employees tend to put self-interest before company interest by making purchases (especially large ones) on behalf of the company because of the incentive of earning rewards. Employees may compete against one another for purchasing rights, or buy things the company doesn’t really need to rack up more points. In worst-case scenarios, employees can double purchase supplies, products, or invoice records, all of which result in non-refundable extra spending from the company account.

This example may sound pessimistic; like small businesses should act as if they don’t trust their employees because they’re afraid of being defrauded. Instead, we choose to think about it as respecting their employees’ loyalty and integrity by limiting the opportunity to commit and justify a crime.

How to Use Rewards Appropriately

We know small businesses usually don’t have the rigid financial structure that helps keep larger companies safe from fraud, but the key to preventing credit card abuse is the same at all scales: internal controls.

To reduce the ease and therefore the risk of fraudulent behavior, establish receipt reporting procedures and have a bookkeeper intentionally monitor purchases. In addition, consider using the following additional controls:

  • Use credit cards only for non-invoiceable items, such as meals, car rental or mileage, or other one-time purchases. Paying for invoiceable items (utilities, leases, etc.) with credit cards makes it difficult to dispute transactions down the road and adds additional bookkeeping problems.
  • Spend rewards points on company expenses. Since the purchases should support the mission, any benefits earned from them should do the same. Companies with multiple divisions could determine ways of portioning rewards spending so everyone receives the benefits.
    • If the benefits of rewards cards remain with each employee, the company needs to report these earnings to the IRS as additional compensation either in payroll or as a 1099.
  • Distribute credit cards sparingly. Because credit cards generate a monthly bill, transactions aren’t reported as they come, but rather at the end of the billing cycle. Using too many credit cards delays cash flows, affects budget vs. actual analysis, and generally makes bookkeeping more difficult.

Credit cards and their associated rewards programs aren’t inherently bad things. When used properly and monitored closely, they can help an organization save money and achieve goals.

Leaders Go First

Creating an environment that’s free of conflicting motivations is difficult, but worth the effort if it means avoiding a costly run-in with fraud. Leaders are responsible to set expectations, cultivate integrity, and encourage good purchasing habits among employees. Simply demanding employees behave a certain way won’t make a difference unless the work culture reinforces it.

John Maxwell always says, “Culture eats vision for lunch.” No matter how strongly a leader projects an idea, it won’t happen without the culture to support it.

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