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A recent article in The Wall Street Journal called attention to the constant problem for business owners of employee theft. The article noted that employee fraud tends to rise during tough economic times when employees are feeling financial pressure in their personal lives. With a lack of sophisticated internal controls, small companies are especially vulnerable. Often, affected business owners are in a complete state of denial, attributing a decrease in funds to lower sales.

In our book, The Danger Zone, Lost in the Growth Transition, author and B2B® founder Jerry Mills devotes two chapters to this subject. B2B® partners often find that many business owners unintentionally place their employees in a position to steal from the company by giving them almost total control over the company's finances and having absolute trust in them.

The book describes an actual situation Jerry encountered with one of his clients involving a controller who, over the course of a decade, had stolen over $1,000,000 from the company. The theft was nothing elaborate, but the controller had major responsibilities and had the complete trust of the owner. The company also had an independent CPA firm issue quarterly unuadited reviewed financial statements which gave the owner a certain amount of comfort related to the company's cash and inventory.  The controller wrote checks to herself in amounts of $6,000 - $8,000 per month and coded them to cost of goods sold. With her responsibilites and the company's lack of internal controls,  the theft was easy to hide from the owner. Subsequent to the discovery of the theft, the owner sold the company's assets to an out-of-state buyer and most of the company's 150 employees lost their jobs.

A recent survey by the Association of Certified Fraud Examiners found that  the  top five methods of employee fraud schemes at companies with fewer than 100 employees involved: Billing (28.7%), Check tampering (25.4%), Corruption (23.1%), Theft of cash before it's recorded on the books (20.8%) and Expense reimbursement (15.5%).

Who is watching your controller (or bookeeper, finace manager, etc. - whatever you case may be)? Often business owners are not trained to catch fraud committed by employees or are simply too busy to focus on the issue. Sometimes it is just a state of denial. Do not rely on you CPA firm's audit or review procedures to detect employee fraud as these engagements are not designed for that purpose.

As a business owner, be alert to signs of a possible problems such as employees who appear to be living beyond their means or who never take a vacation or who guard access to the accounting system. Business owners should also review all cancelled checks and look at the endorsement on the back. It's also a good idea to review the bank statement each month paying particular attention to transfers.

Often, time will not allow a business owner to properly oversee the financial functions of their business. A better solution would be to engage a senior-level executive to watch over the shoulders of your controller, allowing him or her to come into your place of business at least once a month to look into the computer system and look at the details of the financial statements. By letting your staff know that this process is in place, any temption to steal should be reduced.

No process can guarantee complete elimination of employee fraud, however there are steps that you, the business owner, can take to minimize the chance of fraud in your company. The partners of B2BCFO® are available to assist you to develop those steps.