One of the most serious threats to the success of a small business is employee theft. The Association of Certified Fraud Examiners estimates that the typical business will lose an average of 6 percent of revenues from employee theft.
How is it possible that a business owner could not have known their employee was stealing from them? Situations like this happen all too often, and in fact, this happened to a client of mine that is a commercial construction company. What we found is that the crime was committed by someone you would have never suspected and this case it was from a long standing employee.
Without breaching confidentiality here are the facts:
- Trusted employee of over 20 years.
- Position: Accounts Payable Clerk
- Encountered financial difficulty with an alcoholic and drug abusing husband.
- Setup a ‘dummy’ company to generate false invoices- with a real EIN tax number.
- Started small at first- $50 or $100 with the ambition of paying it back later. Ultimately embezzled over $200,000.
- We found that the City and County Attorneys were “too busy” to prosecute this ‘White Collar Crime”. We later concluded that City and County Attorneys were simply telling us that the business owner, “should have known better”.
While we all like to think the best of our employees, it’s critical that you have policies and procedures in place on how you handle money. If you don’t have proper controls in place, you’re just inviting trouble. So, what should you do to ensure that you have controls in place to minimize the opportunity for embezzlement at your company? Here are some tips:
1- Don’t leave cash or credit cards lying around in an unprotected spot. It can easily disappear, and you don’t want to tempt people by being careless.
2- Don’t use signature stamps for checks. They’re too easy to misuse. Sign the checks yourself with a pen.
3- Minimize the number of employees who have signature authority on your bank account. On amounts over $1,000 you might consider Two Signatures Required.
4- Make deposits nightly so that excess funds aren’t left onsite.
5- Rotate your staff via cross-training so that multiple people know multiple functions. This means multiple people will have the ability to do audits on each other’s work to ensure that processes are followed. It also minimizes the chance of theft. You may also want to pull in your outside accountant or CPA to do spot checks from time-to-time.
6- Have separate check cards for each individual. You want to know exactly who’s spending what. Remember, embezzlement isn’t just about taking cash. Employees often misuse credit cards to purchase personal items.
7- Have a close relationship with those key employees who handle your cash and bank account. This offers some protection for your company because it can dissuade people from stealing- they won’t want to hurt someone they care about.
8- Do a background check on your employees when hiring them to see if they’ve had financial problems in the past. It may be a sign that they’re struggling financially and might be tempted to take resources from the business to resolve personal financial problems. Feel free to conduct further background checks on existing employees to see if any problems can be detected. Make certain your employee agreement and/or employee handbook allows for you to take this action.
9- Be aware of ‘life style’ changes with your employees. The commercial construction company owner noted later that the embezzler drove a nicer and new car than his, wore trendy and expensive clothes, always had expensive haircuts and manicures, had a new boat, had a second home in the mountains. All this for someone making just $40,000 per year.
10- Any person handling money, checks, credit cards or banking transactions, must take a continuous 2 week vacation. During this vacation they are not allowed into the office, nor conduct any business in your behalf. Be sure to lock them out of your database, so they have no remote access to any sensitive files. Often times, questionable items will rise to the surface during this 2 week period. If there are any further suspicions, bring in a bookkeeper or CPA to do a quick audit.
11- Institute a proper division of responsibilities. Assigned these responsibilities to different people to help provide a checks-and-balance function at your company:
- Preparing checks for payments
- Receiving payments from customers
- Making bank deposits
- Signing checks
- Doing bank reconciliations
Due to the fact that no legal authority was willing to prosecute the embezzler, the owner and his CPA issued her a 1099 for the entire amount of embezzlement. The IRS performed an audit on her and then paid her a personal visit for past due taxes and penalties. In the end she lost everything, but in turn so did the business owner.