Thinking Tech

Employees steal from businesses every day. I don't know why I thought of this issue. I guess that I've been working with a few clients that seem to have some exposure to Fraud. So here goes.

A Certified Fraud Examiner (CFE) is trained to detect, prevent, and determine the extent of fraud. I'm not a CFE, so anything I may write here is based on my experience as a CPA, not on additional training or expertise on fraud. If you think you have an issue with fraud, I can find someone to refer you to, but I'm not the guy.

During my career, I've known many CPAs. One of the favorite issues for discussion is the fraud they've seen. Here are some of the best/worst:

• The company had three groups of people who could sign checks. The bookkeeper would produce a check to a "short-name" company (VISA, for example), then get the President to sign. This check would go with the bill. Another check would be signed by the Vice-President. This one would have "VISA" erased and the bookkeeper's name inserted. The expenses were hidden in a variety of accounts. Best I could tell from my CPA friend, she got about half-a-million before they caught her.
• The secretary who just wrote checks from the operating account in her name and buried them on the financial statement. No telling how much she got.
• The accountant who stole the cash from "counter" sales and the coke money.
• The bookkeeper who doubled her own salary and approved personal loans from her 401(k)
• The company manager who came in on the weekend, did work with company materials and machinery, and sold it at a fraction of what it cost the company to produce
• The foreman in the building products business who set aside a certain amount of each received shipment as "rejected" to be returned. This was placed at a special location during the workweek. The foreman then had the (completely different) weekend crew move the "rejected" product to a special warehouse. By the time they caught him, he had stolen enough to build a house for himself, a garage for his father-in-law, and he had started on a new house for his sister-in-law.

Well, you get my drift. All of these were small businesses. None could afford the loss. All got taken for several thousand dollars, some for several hundred thousand. And, perhaps most important, none of these companies were stupid or negligent. They were all duped. And so were there accountants. Sometimes for many years. Here are some of the common ways people steal:

• Setting up dummy vendors (really themselves or accomplices) and paying invoices to them.
• Taking kickbacks from vendors to continue approving artificially high prices
• Lapping. Lapping is taking cash (or check) and covering the cash stolen with later cash. It works like this: Customers A & B pay $200 which is stolen. Customer C pays $250. $200 of Customer C's payment is applied to A & B, $50 is stolen. This continues until the person is caught. Obviously, the person doing this has to keep good notes, can't very well go on vacation, and has to keep stealing more and more to cover earlier theft.
• Stealing cash which isn't accounted for. My auditing professor said that the easiest theft is from churches. There are no invoices, so there is no way to know how much cash "should" have been collected. Poor recordkeeping in situations like scrap sales allow this.
• Selling product off the back dock.
• Stealing product for personal use.

I'm sure there are many more ways people steal, but this will give you and idea. How do you prevent it? Based on my experience, here are a few suggestions:

• Control cash, credit cards, and inventory tightly. Make sure that even highly trusted management employees are not trusted with these items. Many businesses don't control inventory tightly because they believe it will impact customer service. If theft puts them out of business, that's more likely to impact customer service.


• Have a process for approving expenditures and bids that assures that the prices being paid for products and services are in-line with market prices. This will avoid many kickbacks.


• Require vacations, and move employees to cover the function of vacationing employees while they are gone.


• Consider fraud like a cheating spouse. If you suspect it, there's probably a good reason for it; check it out.


• Ask yourself this question about each employee: On a scale of 1 to 10, how much do I trust this employee. Choosing 1 means I wouldn't trust them to close the door on their way out. Choosing 10 means, "I'd give them my entire fortune in cash and expect them to give it back to me even if I were lost at sea for 10 years." If you rank any employee 8 or above, you probably trust them enough for them to have opportunity and means to steal.


• Look for motivation to steal in employees. An employee with constant financial trouble has a motive to steal. Fraud seminars teach that it takes (a) opportunity, (b) motivation, and (c) means [method] to steal. If an employee has any two of the three, watch out!

As small businesspeople, we're incredibly busy. It's easy to just trust people to do what they are supposed to do, but if we ignore the signs that someone might be stealing, we're asking for trouble.