CFO of local National Kidney Foundation chapter said to have taken more than $175,000 from chapter! Executive assistant for a Chesterfield car dealership charged with taking more than $500,000! This is just a snippet of what we have seen in the local Richmond newspaper in the past few months.
According to a survey by Auditors Inc., as many as 40% of small businesses have been embezzlement victims. But it can be hard to track; only 2% report the crime. Apparently, business owners are embarrassed and worry that creditors will deny loans in the future if word gets out. Some estimates indicate that more than $400 billion is stolen annually.
Small businesses and small organizations are more vulnerable to embezzlement because often a single person has access to, or control over, many business activities like writing checks, making deposits, reconciling the monthly bank statement, and writing payroll or tax checks. Personally, as the former owner of a payroll company, I have witnessed numerous instances of my past clients’ employees giving themselves a “pay raise” that, only later, an owner discovers.
Why are there so many instances of employee embezzlement, particularly in the small business sector?
A study conducted by the accounting firm of KPMG Peat Marwick identified three key factors that determine whether a person will commit fraud. These factors are:
Situational Pressures
An employee may be under pressure due to excess debt, job frustration, etc. Often employees feel that they are unable to share these problems with their family or co-workers.
Opportunities
An employee’s opportunity to commit fraud generally increases as responsibilities increase, especially when there are not sufficient internal controls in place.
Personal Integrity
This is probably the single most important factor! A person intent on committing fraud can often succeed even in a well managed environment. Conversely, a person with strong moral values will probably not commit fraud, even when faced with situational pressures and the opportunity to do so.
So, the problem is serious and pervasive. What can you, the business owner, do to protect yourself? Although there are many answers and steps that you can take, they fall into only three major areas:
Know Who You Are Hiring
Ironically, most employers fail to do even minimum background checks. Further, typically only large companies perform background checks on prospective employees even though such checks are now extremely affordable and quick. If you aren’t performing background checks today, contact us for assistance in doing so. Additionally, consider using a testing service to screen for attitudes about honesty in the work place. One of our
Strategic Partners, Charles Wood
www.attributesforsuccess.com has a very easy to administer test that costs only $25!
Have Control Procedures In Places
Take steps to prevent a single person from accessing your bank account, as well as paying vendors and processing receivables. Some basic examples are:
- Have one person receive payments and have a different person authorize payments.
- If you receive cash, have two people responsible for receiving and counting the cash and signing off.
- Have your bank statements mailed directly to your accounting service for reconciliation. Make sure that you receive a report of that reconciliation.
- Consider using an outsource service to handle billing and payables.
Work with your
CPA to create a set of written procedures that clearly defines the processes and fully delineates employee responsibilities, in order to provide both enforceable internal controls and separation of duties.
Follow Those Procedures!
A sure sign of potential problems is when an employee consistently fails to follow established procedure. Make sure that you have a check off mechanism for the critical activities that show
“who did what when”. Again, if you need assistance, please call on your
CPA to help create such control procedures.
In summary, think about why you are working so hard in your business. You want to make money! But, money made is not the same as money kept. If you don’t participate in the oversight of the control procedures, you might just discover (only too late) that you have been making money for someone else.
