Employee Theft
Is it Happening to You?

Ron Willingham the founder of Integrity Systems advises  “don’t be afraid to ask the hard questions.”  So I ask you, are your employees stealing from you?  How do you know?  It never ceases to astound people that a trusted employee could steal from you. It angers you and makes you sad, but it is happening every day. Large amounts are stolen from businesses and the most vulnerable companies are sustaining the biggest losses. 
 
In its 2008 Report to the Nation on Occupational Fraud and Abuse, Association for Certified Fraud Examiners (ACFE) cites that small businesses are especially vulnerable to theft.  The median loss suffered by companies with fewer than 100 employees was $200,000.  This was the highest of any category.  Unfortunately, small businesses have consistently suffered the largest losses of any category in their annual studies.  Check tampering and fraudulent billings were the most common small business schemes. In fact, it was a check tampering scheme that cost Portland area business Paul Schatz Furniture over $500,000 in theft losses.

 Are you a victim?
 
 Most of us would immediately say "No, all my employees are completely trustworthy." In fact, I have never had a business owner answer otherwise! But, what about new employee you recently hired? What about the long-term employee who has had an unexpected life change (divorce, death, or other experience) that has affected his/her financial stability? What about that employee that continually lives beyond his means?  The trusted bookkeeper at Paul Schatz Furniture who was previously considered "family" blamed her embezzlement on a gambling addiction.   The company was somewhat fortunate because the theft was discovered after only two years.  Check fraud schemes generally continue much longer.  The bookkeeper admitted in court that if she hadn’t been caught she would still be stealing.

Considering the potential losses 

Could your company sustain a loss of this magnitude?  It behooves small business owners to make the prevention of fraud a priority in their businesses. The first step in preventing employee fraud is letting employees know you're watching for it. "Perception of detection is a very powerful deterrent," says John Gill, a certified fraud examiner and general counsel and director of self-study publications for the ACFE.

7 Steps to Take Right Now

In his book "How to Prevent Small Business Fraud" Gill shares some of the most useful approaches that help fortify a business against fraudulent activity.

1.    Hire the right employees. Conduct background checks for people handling inventory and money. Check past employment, criminal convictions, references, and education and certifications. Also, conduct drug screening since often, according to Gill, employees will steal from a business to support an addiction. Remember, however, to always get the written consent of candidates before doing research since many federal and state laws govern the gathering of such information.

2.    Maintain strong internal controls. Have checks and balances in place, suggests Gill. "For example, you don't want a signatory on the bank account balancing the check book," he says. "If I can write checks on the account and I reconcile the bank book, I'm free to manipulate the check register."

3.    Make sure expenditures are approved. For every expense, have a manager and someone in accounting approve it. The supervisor will ensure that the expenses are valid, while accounting will run the math.

4.    Monitor cash situations. In a retail situation, Gill suggests having security cameras monitor activity at registers and storage areas where inventory is kept. "People are less likely to do it if someone is watching them," he says.

5.   Conduct surprise audits. Catching an employee off guard could be your best bet in discovering fraud. "The key is that an employee generally doesn't know what's coming and won't have the time to change the records to hide the fraud," says Gill.   "We've seen cases where somebody creates a phony company, submits invoices to accounting and accounting sends payment to a P.O. Box," says Gill. In one case, Gill recalls, an employee who set up a fraudulent business through which he submitted preprinted, consecutive numbered invoices to his employer every few months. When outside financial professionals examined the invoices, particularly the invoice numbers, it seemed funny to them that the business submitting the invoices didn't have other clients or was having an extremely slow year since each consecutive invoice was sent to the company. A surprise audit also can uncover duplicate invoice amounts and duplicate invoice numbers, both of which can be red flags for possible wrongdoing.

6.    Create a fraud policy. "Don't create anything complicated," says Gill. Simply inform employees during employee orientation, training programs, memorandums, or other communications that fraud is not tolerated and let employees know what to do if they suspect fraud. Also, be sure to inform employees of the actions the company will take if it suspects or determines fraud has been committed. 

7.    Enforce mandatory vacations. "Our research has shown that if employees don't take vacation, it can be a red flag," says Gill. "They're afraid to go on vacation because someone is going to find out that something is not right." Requiring employees to take time off can aid in the prevention of some frauds.

Steal from My Own Company?

In his book, "The Danger Zone, Lost in Growth Transition",  Jerry Mills founder of B2B CFO® discusses the dangers of owners taking cash out of the till, bringing inventory home, and other like activities. These actions can set up negative perceptions with employees and create an atmosphere that taking from the company is tolerated.  Remember, we want to set the right example and be the leaders that people can look up to and respect at all times.  
There are many ways an employee can steal from their employer. There are also many ways an employer can prevent this activity. Being aware is the first step.

 My partners and I at B2B CFO® have over 4,000 years of cumulative experience assisting businesses in developing internal controls to prevent and detect employee theft and fraud.

.