We all know the stories of doing business with a handshake. Now, imagine while you’re shaking hands, the person’s other hand is pillaging your pockets and wallet. And I am not referring to your customers – but rather, your employees.
Sound absurd? Then consider that 7 percent of ALL revenue in the United States, a total of $600 million, is lost because of employee fraud.But, if you’re like most business owners, you’re probably saying, “Not my employees. I personally hired them and know I can trust them. “It’s time to think again and get serious about fraud prevention before it’s too late. Consider this all-too-common scenario:
“And probably the worst thing is that I trusted her,”the business owner tells me.
“Of course you did, and it was that trust that allowed her steal from you,” I replied.
The business owner just finished telling me how his longtime accounts payable clerk was caught paying her credit card bills from the company account. And catching her, as with many fraudulent acts, happened by chance. One day, as the business owner arrived at work, he met the mail carrier at the doorstep and took the mail himself. He noticed the bank statement and having not paid much attention to the account for a while, he opened it. He found canceled checks to unknown accounts and saw charges he did not recognize. Those accounts and charges, after a lengthy and costly investigation, turned out to be the clerk’s personal expenses. The investigation revealed the clerk stole over $200,000 over a period of several years.
A loyal employee for almost 10 years, the clerk was one of the last people the owner would ever suspect of such acts. In fact, she was a model employee, and someone he trusted. But, in the end, it was this trust, and a lack of oversight and internal controls, that actually contributed to the fraud and cost the business owner thousands in revenue.
And before you say to yourself that this can only happen with large companies, fraud occurs at small businesses as well where the average loss is $100,000 per occurrence. And the consequences of ignoring fraud and not protecting your business? Failure. In fact, approximately one third of all business failures are due to fraud-related losses. Trusting your employees can be one of the quickest ways to financial devastation for you as a business owner.
While we all naturally want to trust our employees, the figures don’t lie. Plus, it’s not just clerks or lower level employees you have to worry about. In a study by KPMG, directors and senior managers were responsible for almost two thirds of the fraud in 100 cases surveyed. And, just when you thought loyalty and longevity made for trustworthy employees, the study found one third of the cases involved employees with 10 or more years of service with their respective companies.
Though there are several fairly simple things business owners can do to make it more difficult for employees to steal and commit fraud, most business owners have never taken the time to think about it, much less the time and effort to institute some form of fraud prevention. Some business owners resort to brute force to prevent fraud – they sign all the checks themselves, enter the payroll and don’t give anyone access to the business’accounts. That’s all well and good, but what happens when your business grows? Do you still want to sign all those checks?
In a growing business such preventive measures will last only so long. Taking responsibility for completing these tasks just puts the burden on you to not only manage the business but to run it as well. And, as you have seen in my previous articles, this is no way to grow your business. Why not look at what larger companies do and institute internal controls allowing you to offload the grunt work, yet maintain an adequate level of oversight of our business’ operations.
Internal controls are simply a system of checks and balances that prevent any single person from exercising too much control. They help prevent the ability of employees to perpetrate and cover up fraud or theft. In the matter of accounts payable, the basic concept is that the person who creates the payment (i.e., writes the check, creates the purchase order) is not the same person who authorizes the payment. On top of that, another person is responsible for reconciling the payment and account. Such controls institute natural checks and balances throughout the payment process that make it extremely difficult for an employee to commit fraud.
But nothing beats a personal touch. You still need to check the books yourself from time to time. There truly is no substitute for owner oversight, as no one knows your business better than you. You often can notice discrepancies quicker and more easily identify problematic activity. And, while it is important to delegate, you never can delegate the ultimate responsibility of managing your business and ensuring its success.
Here are some additional internal controls to consider for your business:
- Assign different employees to pay the bills from those responsible for reconciling the bank account (if you do not already reconcile your bank account monthly, make that 1a).
- Maintain oversight of the accounts. Have the bank statements and payroll reports sent to your home address, or instruct your staff that you are the only one to open the reports. And, after you open them, look at them and make sure all the charges are consistent and logical for your business. If something looks unfamiliar or sticks out, ask about it. If you have partners, send the statements to the partner with the least involvement in the business’ financial processes.
- Personally approve the addition of new vendors.
- Instruct supervisors to approve payroll reports before the payroll goes out.
- Rotate the responsibility for payroll every quarter. This also provides succession training and contingency planning should your primary payroll person not be available. Also, have someone who’s not in payroll hand out the checks.
- Maintain physical control and inventory of blank checks, credit cards and other methods of payment, preferably in a locked cabinet to which only you have the key.
In order to ensure that we have talked about employee theft and fraud with before you become a victim and not after, I am co-sponsoring the event, “Who Could Be Stealing From Your Business?” I hope that you will make it a priority to join us for this important event designed especially for business owners. We have two different experts coming to look at practical solutions for preventing fraud. For more information visit, download our flyer. See you there.