A small business owner I know recently discovered that one of his employees embezzled about $300,000 from his company over approximately eight years. The employee was responsible for some accounting functions that included payroll. Every payroll, he would create the information needed to be sent to their PEO, get it approved by the owner, and then submit a significantly different number for his own salary. The business owner never took additional steps to verify the accuracy of the payments — and the employee knew it!
Every year, billions of dollars are lost by businesses nationwide to employee fraud and theft, and the number of incidents is rising. Small businesses are especially vulnerable because of the small number of employees and challenges of creating effective internal controls and segregation of duties. In 2012, the Report to the Nation on Occupational Fraud and Abuse (www.acfe.com/rttn-international.aspx) issued by the Association of Certified Fraud Examiners reported that small businesses suffered a “disproportionately large” median loss of $147,000. Imagine if an employee stole that much money from you. How would if affect your company?
Small businesses may be at a greater risk of employee theft because of the family-like environment that is often created. Owners tend to put down their guard because of an inherent trust factor that develops. However, it’s important to keep in mind that not all fraud is intentional and premeditated. Fraud can occur because the employee is dealing with personal financial stress, mad at the boss, feeling entitled or just plain greedy. Unfortunately, these factors are not always evident to the business owner. So, to ensure his or her business is adequately protected, a business owner needs to put some checks and balances in place. For now, let’s look at some ways employees take advantage of their employers.
Unfortunately, I’ve come across several different types of fraud and theft during my years in public accounting. Here are some of the more common:
1. The creation of fictitious suppliers. An accounts payable clerk created a fake supplier, issued invoices for product that, obviously, the company never received, and then stole the money that was issued as payment.
2. Theft of supplies or inventory. How many people are guilty of taking some pens or paper home from the office? Unfortunately, most people don’t consider this petty theft — but it is. I’ve seen situations where boxes of inventory go missing — taken by employees and sold for their own benefit.
3. False worker’s compensation claims. This is common and can be a very costly. An employee has a minor accident at work and claims more serious injuries. The employee gets off work and gets paid worker’s compensation while the company pays for replacement help and potentially higher worker’s compensation fees.
4. Overpayment of payroll. As described in the opening paragraph, an employee paid himself more than his regular pay or issued payment for vacation time already taken.
5. Fictitious inventory returns. An accounting clerk generated paperwork for fictitious inventory returns, then create a check payment to herself. No other paperwork was required as proof that the inventory was returned.
I’d recommend you step back and assess whether it would be possible for an employee to commit any of these types of fraud in your workplace. Don’t try to convince yourself that your employees are different and they would never take advantage of you. Unfortunately, I’ve seen too many business owners with this belief get ripped off.
Creating and implementing some simple safeguards can help to reduce the risk of fraud. While the best alternative is ensuring that an employee doesn’t have full control over any of the assets, this is not always possible for a small business because of the small workforce.
Adding these easy-to-implement protections will help to secure assets:
Have bank statements sent to the business owner’s house. The owner should quickly review the statements every month and look for any oddities. The accounting clerk will be more hesitant to act inappropriately knowing the boss is eyeing the bank account.
Only the owner of the company should sign checks. Giving up this authority is like giving someone the keys to the vault. Temptation lurks.
Install security cameras at warehouse exit doors. This gives the impression that employees are being watched and makes theft of inventory less likely.
In January, the owner should review all W-4 slips issued by the company. If an employee is embezzling money through the payroll, it will quickly be noticed.
Work with a specialist to assess the business processes to see where holes exist and how they can be closed.
Cindy Gordon of Business Rescue Coaching (www.BusinessRescueCoaching.com) works with business owners to create highly motivated and productive workforces, bringing more success to the organization and less stress to the owner.
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