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Hope For the Best
and Insure the Rest:
Fraud and Theft in Your Business

There is an old saying in life. "Keep your friends close and your enemies closer." The same applies to your employees, even though sometimes it's hard to tell which one they are. Today small and large business owners are plagued with the problem of employee theft. It may as small as a few office supplies going home, time wasted playing on the internet, or it may be as big as the theft of money or other company assets.

Many employees these days have more and more pressures on them. They are financially strapped, up to their ears in debt, and the bill collectors are their most frequent callers. So is it any wonder that sometimes they decide to help themselves to the company checkbook? And sometimes, we make it so easy for them.

Once I had a client who sent her employee to the bank to deposit her federal payroll taxes. The employee then negotiated the check and paid her personal bills with it. We discovered it when we got around to catching up missing payroll tax reports and found none of the payments we thought were there actually were. This is what my client did wrong:

1) She did not ask for a receipt from the bank. This would have stopped the employee dead in her tracks.

2) She did not keep up with filing her payroll tax reports. Again, we would have found out about it very soon.

3) She did not reconcile her bank account monthly. The employee in this instance also changed the amounts of the checks.

This same client once had commission checks stolen by another employee and cashed at her bank. How, you ask, did the bank let the employee cash checks not made out to her? Simple. She borrowed the client's driver's license and the bank gladly allowed her to cash them.

So how do you protect you and your company from this kind of theft? Well, there aren't any fool-proof answers (or else I would have sold them all and made lots of money.) But here are some ideas. Most are just good common sense.

Don't let the person who writes checks reconcile the bank account. I have a client who has the bank statements sent to his home address so he can look them over first. Ideally, the person who gets the bank statements should be the one to reconcile the bank (or even better to give it to the CPA who should reconcile the checkbook and be paid well for doing this). At a minimum this person should review the deposits and canceled checks for anything out of the ordinary.

Make your employees take a vacation now and then.
If they are cooking up a scheme, having to take a week or two off might throw a monkey wrench into their plans. Most of these embezzlement schemes are high maintenance and take a lot of work. So taking the employee away from the office might stop it right there. Of course, if your employees know in advance about this policy, it might stop them from even thinking about it in the first place.

Ensure that computers and email are being used correctly.
Check this one with your lawyer first. As employers providing your employees with workspace and tools like computers, you have a right to ensure they are being used correctly. Searching employee desks and reviewing email and computer files might be controversial, and possibly illegal, but they also might find out something you need to know. There are even software programs that you can install on employee computers they tell you everything they did on their computer and email it to you.

Have your financial statements audited by a CPA.
Having your financial statements audited by a CPA will not find someone embezzling from you 100% of the time. In fact, the language in most engagement letters specifically states that it will not guarantee finding these kinds of things, but you can count on this. If the CPA finds anything that shouldn't be happening, they have a professional responsibility to bring it to your attention (assuming it is material - no one wants a CPA who tells you that your secretary took home a box of paper clips).

The long and short of it is that if someone wants to steal from you badly enough, you can't stop them. People will always find a way to defeat any controls you come up with. The newspapers and accounting literature are ripe with stories of how their customers, employees and vendors ripped them off. Deal with the most reputable people you can find. And in closing, my advice to you is the same advice I give to parents of small children. Hope for the best and insure the rest.

-Mark E. Edgar CPA

See our related article on "Protecting Your Business from Fraud"