By some accounts, fraud costs the U.S. economy approximately $600 billion a year. As a business owner, you have a duty to yourself and to your employees to minimize losses to your company due to employee theft. This article will explore some steps you can take to protect your company’s assets.
Never Say Never!
The biggest mistake you can make as an employer is to blindly trust an employee. Sure, Jim has been a good and faithful employee for 20 years, but that doesn’t mean he is immune to the pressures of life outside of the office. White collar crime is typically perpetrated by people in a position of trust. The trust placed in them allows white collar criminals the access to company assets needed to carry out the crime.
Even exemplary employees can fall prey to outside pressures like drug abuse, financial difficulties and even feelings of being unfairly treated by you, their employer.
To Catch a Thief
Obviously, you must place some trust in your employees or your business will not succeed. The trick for you, as the employer, is to establish policies and procedures that will prevent employees from having the needed access to steal company assets.
Without a doubt, your greatest weapon is your own powers of observation. You look at everything surrounding your business with a critical eye. Shouldn’t you also observe the habits of your employees? After all, they are an asset of your business - and their well-being has a direct effect on successful operations. Some telltale signs that an employee may be committing fraud include:
- Sudden changes in lifestyle for no apparent reason. For example, Jane left the office yesterday in an old red convertible, but when she came to work this morning, you noticed a brand new Mercedes-Benz in her space. It would only be natural to ask how she could afford the new vehicle.
- Known employee financial problems. For example, you open the mail this afternoon and find a notification the IRS has placed a lien on Bob’s wages. Getting relief from financial pressures can be a powerful incentive to embezzle company funds.
In addition to your own observations, you need to establish a strong system of internal controls. It is impossible to list all the controls available to you because each business is different. However, there is one overriding principal to keep in mind – segregation of duties. Simply put, segregation of duties is meant to keep one employee from having so much control over transactions that she or he can successfully hide a fraud. For example, Gertrude was the office bookkeeper. She wrote the checks, paid vendors, collected money and billed customers. Gertrude also reconciled the bank statement and gave only a copy of the reconciliation to the company’s president. It wasn’t until the company had lost $400,000 that the he decided to take his CPA’s advice and open the bank statement himself. Had he placed this one control in effect sooner, the theft never would have occurred.
Randy has been the controller at ABC Company for years. He comes in to work early and leaves late. He works so hard that he hasn’t had a vacation in the last six years. The guy’s an employer’s dream, right? Well, the sad fact is that Randy has decreased the company’s profit for each of the last five years by an average of $100,000. It seems he found it easy to hide the theft as long as he was in the office, but when Paul made him go on vacation this year, problems started surfacing.
The importance of establishing a strong system of controls cannot be overstated. Proper oversight will greatly reduce the potential for loss by convincing employees they cannot succeed in a theft. Finally, a strong control environment will help employees provide management meaningful information by which to run the business.
The old saying that “stuff runs downhill” is true in every business. You set the tone for your company. If you signal to your employees that it’s acceptable to cut corners and beat the competition by less than ethical means, they will begin to believe the same thing. Eventually, they will be able to justify actions that harm you by using the same reasoning you used to succeed, by harming your competitors. Set a tone in your company that ethics are valued above all else. Conduct your business ethically and your employees will be more likely to do so as well.
Finally, provide a way for your employees to report suspected fraud without risk. Many times, employees may see something going on that they consider wrong, but they won’t report it because the act involves their superior. Rather than lose their job or risk harassment, they choose to remain silent. Develop a way for employees to bypass the level at which the fraud may be occurring and make it clear that no employee will be punished for reporting possible illegal acts.
No system to prevent employee theft is foolproof, but there are steps you can take that cost you nothing, yet enhance the security of your company. Give us a call and let’s discuss how you can better protect both your business and yourself.
Have a great April.