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One third of small business bankruptsies are directly related to employee fraud. In Bellevue, WA a bookkeeper stole 4.6 million dollars from her employer.
4.6 Million Dollar Bookkeeper
Picture a thief. What image does that bring to mind? A young man dressed in black skulking through the back alley with a load of valuables from your neighbor's vacant house? A devastatingly dashing couple working in tandem to liberate jewels and other valuables from the cramped bondage of a hotel wall safe? Or perhaps one of the "new" breed of CEOs and CFOs parading nightly across your television screen as they are escorted out of their businesses in handcuffs? Anyone picture a forty year old, slightly overweight woman who faithfully "keeps the books"? Did anyone imagine that it was their own "valued" employee? No? This lack of "imagination" could be costing you, and costing you plenty.
A Bellevue bookkeeper was recently arrested for allegedly stealing $4.6 million from her employer during her eight years of employment. According to Ed Mott of the Bellevue Police Department's fraud division, her embezzlement was discovered when the business owner asked a banker friend to review the company accounts. He quickly discovered that the woman had written herself more than 1,200 checks dating back to September 1993 when she was hired as a part-time accountant. She was able to take money undetected for so long because she was the company's sole accountant.
While the amount of this theft is unusual, the occurrence is not. According to the 2002 Report to the Nation conducted and prepared by the Association of Certified Fraud Examiners, an estimated 6% of revenues will be lost in 2002 as a result of occupational fraud and abuse. This translates to losses of approximately $600 billion, or about $4,500 per employee. If you think this problem is confined primarily to those large corporations where the employee feels anonymous and under appreciated, think again. Last year, the average fraud scheme cost small businesses a whopping $127,500 per occurrence compared to only $97,000 for the largest corporations. The sheer magnitude of such losses for small businesses make them particularly vulnerable, and in many cases leads directly to a business's demise. It is estimated that one-third of all business bankruptcies are a result of employees stealing from their employers.
The Association of Certified Fraud Examiners' definition of fraud includes corruption and fraudulent statements as well as "asset misappropriation," or theft. While the first two types of occupational fraud pose the greatest financial risk when they occur, it is theft that most concerns the small business owner for it accounts for 80% of all occupational fraud. And while many owners believe they diligently guard against theft by their employees, they tend to overlook their managers feeling that these are "valued" employees who have earned their trust. Yet studies show that while the median loss of frauds committed by employees runs at about $60,000 per incident, frauds committed by managers or executives push the loss to an astounding $250,000 per occurrence.
I. Proper Hiring Procedures
How do you guard against this type of loss? Many specialists point to the importance of good hiring practices. Joseph Wells, a certified fraud examiner and CPA, suggests that before hiring anyone, you should conduct a background check to find out as much as you can about the employee's previous experience with other employers and the law. This should include past employment verification, drug screening, credit, motor vehicle, criminal convictions and reference checks.
Dennis DeMey, coauthor of Don't Hire a Crook, says that if you only do three checks, they should be verifying a prospective employee's Social Security Number through a credit bureau such as Trans Union, Equifax or Experian, running a criminal history search and calling for references from prior employees. Each company must decide whether the time and expense of such checks are worth the return, but even the fairly simple and inexpensive reference check can be effective and is rarely used. Many companies have discounted this process because of the growing trend among prior employers of disclosing as little information as possible. But 32 states, including Washington, have now passed laws that provide immunity to employers for passing on legitimate information as long as it is without malice. Taking the time to make a few simple phone calls is worth the effort.
II. The In-House Thief
Although proper hiring procedures is a good starting point in preventing employee fraud, it certainly does not eliminate it. Lt. Ed Mott was quick to point out that the afore-mentioned "4.6 million dollar bookkeeper" had "no criminal background record at all." Most employees who commit fraud don't. According to crime statistics provided by CFE, 60% of perpetrators are first time offenders, and only 20% of those employees prosecuted for theft had actual criminal convictions on their records at the time of their arrests.
Yet the term "first time offenders" can be misleading. Most fraud does not occur as a single incident, but rather manifests itself as a long term scheme that generally lasts for 18 months or longer before detection. The truth is that the employee has repeatedly acted in bad faith over a long period of time. And this time frame only accounts for those employees who have been caught. According to Grant Thorton, an expert on employee fraud, the vast majority of employee theft goes undetected. Many dishonest employees repeat past successes in new surroundings, perfecting schemes as they move from job to job. Couple this with the very real reluctance on the part of many employers to prosecute employees even after their crime comes to light means that many experienced thieves are operating in the open job market, and quite possibly in your place of business. With less than 10% of the employee population responsible for more than 95% of the total losses from employee theft, an "experienced" thief such as this can wreck financial havoc on a small business.
III. Implement Internal Controls
James B. Hunt, a national practice leader of the accounting firm Price Waterhouse's investigative services division, concluded that "the problem of small, successful businesses is that they don't have time to set up the right financial infrastructures." This goes for newly formed businesses as well. With the owner busy with mere survival, he tends to turn over the financial reigns to "trusted" subordinates. In addition, with money tight, it is often a single person handling most or sometimes all of the business's finances. Since opportunity is the single largest factor contributing to employee dishonesty, this situation is almost an open invitation for fraud.
There are many ways to safeguard your business. First, you can decentralize responsibility. Divvy up financial tasks. The person who keeps the books should not be the same person who keeps the money. At the very least, the boss ought to be the one signing the checks.
Make it known that the monthly bank statements will always be delivered unopened to your desk. If you don't have time to go over the checks and the statements yourself, hire an outside firm or person to handle this task for you. When someone other than the bookkeeper opens the statement and looks at all the canceled checks, you eliminate the opportunity for someone to embezzle by check and then get rid of the evidence when the bank statement comes.
Keep an eye out for statement discrepancies. Look for unusual patterns, dual
endorsements and unfamiliar vendors or financial trends. Take, for example, checks made payable to companies you don't recognize, or dual endorsements. One way to convert a check is to take a check made payable to someone else and add another name to its so its payable to both. If there are two signatures, one could be a forgery.
Watch for sick days and vacations. If a staffer never, ever misses a day of work, he or she may be afraid of what you'd discover in their absence. Be suspicious. Require vacations and then let another set of eyes look at your books. You might be surprised at what they find.
Finally, buy fidelity-bond insurance. If after even the most careful scrutiny someone does embezzle from your company, this insurance protects against catastrophic embezzling and other acts of dishonesty on the part of your employees. However, almost all policies require you to prosecute your employee before they will step up and cover your losses. If you are unable or unwilling to do this, don't bother with insurance. You'll only be throwing good money after lost dollars.
Remember, most small businesses cannot survive the losses brought on by significant employee theft. While no one wants to be thought of as Big Brother, prudence demands that you keep your eyes open and your vigilance high. Recognize that even the "nicest" or "most trusted" employee may be subject to temptation or enticed by the money that just beckons to them. Establish procedures and practices that work to preclude the possibility of any employee fraud. The survival of your business depends upon it.
About the author: Terry Simon works for Better Times Consulting. http://www.bettertimesconsulting.com |
