Have you ever had an employee steal from you? Would you know if they were? In this post I want to share some information on ways you can control theft in your small business.
A friend of mine, who works for a small company, investigated the second incident of employee theft in less than 5 years. The last time the total was well over $100,000 and this time looks to be almost as upsetting. Last time my friend was like a bloodhound, getting to the bottom of it and uncovering the full scheme. This time around, she used a healthy dose of skepticism and uncovered the fraud herself; she went from bloodhound to watch dog.
If it’s happened to you, you know all too well how hurt, frustrated and angry it makes you feel. If you’re the owner of a small business, it may not make you feel much better but you’re not alone. In fact, a survey by the Association of Certified Fraud Examiners showed that the smallest organizations (defined as less than 100 employees) were the most victimized by fraud at a whopping 31.8% in 2012 and a median of loss of $147,000 . The losses for larger companies were lower.
Larger companies are able control theft more effectively because they have more resources to protect against it. They’re able to use techniques like outside audits, internal audits, risk assessments as well as other prevention and detection activities.
However, if you’re a smaller company, you need to rely more on cost effective measures to guard against employee theft. There are some business practices you can put in place in your business to deter, and hopefully avoid, these types of incidents from happening to you.
Consider These Practices to Control Theft in Your Business
This business practice is especially important for prospective employees that handle company funds like cash, checks, inventory and even customer accounts. You may also consider doing background checks on employees that are licensed in their profession to make sure that there are no problems from their past that could jeopardize your company. Background checks can run as low as $25 to as high as several hundred depending on how deep the check. You need to weigh the cost of a background check against the risk your business faces to determine if it is worth it for your business.
Establish code of conduct
A code of conduct establishes the company’s position on the conduct of its employees. It communicates to employees standards like honesty, integrity, professional conduct, fairness etc. Owners and managers of small businesses should also take steps to not only effectively communicate the code of conduct but also practice what you preach by following those standards in order to set the tone from the top.
Keen Monitoring and Observation
Keep a watchful eye of signs that may lend themselves to a risky situation developing. A common example is an employee involved in a theft scheme never takes vacation to ensure the scheme is not uncovered. Also, changes in behavior or actions by an offending employee can be a red flag. In my friend’s company, hindsight analysis revealed that the offending employee’s financial problems seemed to evaporate and even improve over time and yet there was no significant change in the employee’s pay.
Establishing Internal Controls
An internal control is a process or procedure designed to minimize risk. They can take on various forms depending upon the nature of your business. There are too many internal control procedures to lay out in detail here, but you should think about where the risk lies in your own business. For example, cash intensive businesses should look at the business processes for collecting and safeguarding cash as well as check and balances for detecting problems. If you have inventory that can be easily used, sold or concealed, you should review inventory control procedures to ensure that inventory is monitored and safeguarded to prevent theft. According to an often-cited statistic from the National Restaurant Association, they estimate that 75% of inventory loss in restaurants is due to employee theft.
Regularly Reviewing Internal Controls
It’s also important to review internal controls periodically. In cases where there’s a change in business process or even the business environment, controls that were in place may no longer be effective. Also, make sure controls continue to be followed over time. In the case of my friend’s company, an internal control in place stopped being followed by the person who took over the head accounting position. That failure to follow the control procedure allowed the 1st theft to go undiscovered for years.
Establishing anti-theft policies and practices
According to the survey, besides management review, the other top ways smaller companies detected theft was “by accident” and “by a tip” . Sadly, we can’t always rely on chance or accident. However, setting the tone through your code of conduct and good communications allows tips will come more freely in an open and honest work environment. A few examples of other policies and practices that help are required vacations, regular reconciliations of bank accounts, supervisory sign-offs and regular inventory counts.
Now, you’re aware of some of the ways smaller companies can try to control theft or at least deter theft in their business. Take a hard look at your own business. There may be some small changes you can make that in the long run can save you a lot of money and a lot of heartache. For more about Controlling Theft of Cash Receipts check out my earlier post here.
 Report to the Nations on Occupational Fraud and Abuse, 2012 Global Fraud Study. © 2012 Association of Certified Fraud Examiners. pp. 26-27 and p.18.
Control of theft in a business is a difficult problem for business owners especially when it comes to cash businesses. In small businesses, it’s more challenging due to the difficulty of segregating duties among a limited number of employees.
How can you, as a business owner, take steps to limit some of this risk in your business and control cash?
In this post, we will concentrate on examples on the cash receipts side of a business and what you can do to prevent theft, in the first place. The instances described below involve employees or even outsourced positions such as a bookkeeper.
Cash Stolen from the Cash Register
One of the more common forms of theft is stealing cash directly from the business. In a cash intensive business, such as a restaurant, bar, clothes shop or department store, this may be taking cash from a customer and not ringing up the sale in the register. If it’s not caught in progress, it may eventually show up as inventory shrinkage down the road and become harder to detect and ultimately prove.
There are steps that the owner can take to prevent or curtail an employee from taking the risk of being caught. Surprise cash drawer counts, better supervision and control over the inventory can help to either deter or detect these types of scenarios. Surprise register counts and supervision remind employees that ownership is checking and monitoring the cash receipts of the business. Control over inventory, using perpetual inventory systems, inventory counts and monitoring inventory shrinkage rates can help identify problems before they get out of hand.
Cash or Checks Received on Customer Accounts
Another main category is skimming cash or check receipts on accounts receivables. This usually involves taking cash or checks from customers, pocketing the payment and not recording these payments on the company’s books.
This type of theft can become more complex if the employee takes extra steps to conceal the theft. In this scenario, an employee could hide the theft by taking the payment and record an adjustment to write-off the balance for that customer. In this way, the customer will not complain of a lack of payment since his account was manually adjusted.
To avoid this type of theft, the same person who opens the mail should not have authority or access to the accounting system to adjust customer account balances. By separating these functions, employee theft can be discovered through reconciling customer accounts or by customers who contest their outstanding balance.
Received on Account, a More Complex Scenario
Sometimes an employee will engage in a scenario referred to as lapping payments. The employee will take payments from a particular customer, pocket the funds and then use payments from a different customer to cover the payment on the original customer account.
To illustrate, Customer # 1 sends in a payment on account, the employee pockets the money. The employee uses a payment from Customer #2 to conceal the theft by applying it to Customer #1 account. Next, Customer #3 makes a payment and that payment is applied to Customer #2’s account and so on. An employee could restart this scenario with a new set of customer payments and accounts. Lapping can continue undetected if the same employee is responsible for opening the mail, making the deposit and applying customer payments. These functions should be separated among employees to discourage this type of theft in the business.
The important message for a business owner is that duties of cash handling should be separated from the recording of transaction into the company’s books. In addition, it is important to remember that monitoring things like inventory shrinkage, supervision of cash transactions and preforming regular monthly bank reconciliations with help to control theft of cash receipts in your small business.