Clerk With A Cadillac

Dec 06, 2010

Clerk with a Cadillac?


According to the Association of Certified Fraud Examiners (ACFE) in 2009, total business fraud was $2.9 trillion dollars; small business, defined as less than 100 employees, accounted for 30% of all frauds or $870 billion dollars! The median loss at small businesses was $200K and was typically taken over a two or three year period. More than 90% involved cash and/or inventory stolen.

Why are small companies hit so hard? Like many crimes, it’s often a crime of opportunity. Small accounting staffs make segregation of duties difficult, many times there is limited or non-existent internal control, and financial audits are almost never performed at smaller firms. 

How do these thieves take money from small business owners, who as a rule are smart and diligent?  Although only limited by imagination, many of the schemes have some common themes.  It happens in the warehouse or shop where employees may submit false time sheets or carry inventory out the back door.  It happens in the front office where your own trusted office employees may pay fake vendors, pay fictitious employees on the payroll, pay fraudulent employee expense reimbursements, and tamper with check amounts or payees.  While at some companies, the office staff is playing I want to be a millionaire with paperwork games at your expense, others in Purchasing or Sales may have their own game going with kickbacks or bid rigging.  Unfortunately Cuyahoga County and many others have seen that movie. The good news is the vast majority of employees are honest and hard-working.  The bad news is it only takes one to severely cripple your Company or even take it down.    

So, what are some warning signs?  Do you have large unexplained inventory shrinkage? Unexplained empty boxes in the warehouses? Do you have accounts receivable which continue to get older and older? Do customers complain they sent in a payment but there is a long and regular lead time between when they sent the cash and their account is credited? Cash flow not quite what you were expecting? Have you ever found accounting entries that had no backup? Unexplained entries in the books for large, round figures?  Are you writing off large amounts of bad debt? People living beyond their means may be another tell-tale sign. Do you have a clerk with a Cadillac?

What causes employees to act like this? Common triggers include opportunity such as lack of internal control, or related party transactions that are not at arm’s-length.  Personal financial pressures may cause others to go off the ranch.  Whatever the triggers, generally there is rationalization by the employee that they’re entitled or a sense that they were wronged by the company somehow.

Do not assume you can “profile” these people!  But you can and should take actions to decrease the probability you’ll be hit.  Insist that asset recordkeeping and asset custody be performed by two or more separate people. Cameras in the warehouse might be a good idea.  Do not let anyone refuse to take time off.  Many scams unravel when someone new takes over the work. Do background checks on new employees.  However, don’t assume employee screening is fail-safe.  For legal reasons, many companies today will only confirm prior employment and dates worked. Less than 10% of employees caught stealing had prior convictions.  Set a tone at the top that any allegations regarding impropriety will be investigated, have a zero tolerance policy, establish an ethics policy, and have appropriate document retention policies so people can’t perpetrate fraud and destroy the evidence.

Don’t be penny-wise and pound foolish.  Bring in a professional to help you design appropriate controls to help protect your company. It’s much easier to prevent fraud than to detect it; most fraud is discovered by accident.  Taking sensible actions to protect your company may help you avoid being a statistic.



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