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Avoiding The 'Inside Job'

The hidden threat of employee theft

By J. Tol Broome, Jr. -- Gifts and Dec, 3/1/2010 12:00:00 AM

Most business owners don't consider themselves to be at risk of employee theft or embezzlement. After all, you know your employees well. And besides, you would catch them if they tried to steal from you. Right?

Lest you believe that you are immune from employee theft, statistics indicate otherwise. Just consider these numbing numbers:

According to Crimescreen.com, 33 percent of employees admit stealing a product or money from their jobs in the last three years.
Fraud and abuse cost U.S. organizations more than $400 billion annually according to the Association of Certified Fraud Examiners.
The U.S. Chamber of Commerce estimates dishonesty by employees costs 1 to 2 percent of gross sales each year.
It is estimated by the U.S. Chamber of Commerce that 30 percent of business failures are directly related to employee theft.

Now that I have grabbed your attention about the threat of employee theft, you are likely wondering what you can do to prevent becoming a victim. What follows are five steps to deter your employees from stealing from your business.

Step 1: Create a policy

This may sound elementary and even unnecessary. Everybody knows that they aren't supposed to steal from their employer, so why should we have to tell them in a policy? First, it is important to let your employees know that you are aware that they might try to steal from you, and that you won't tolerate it. As noted above, one-out-of-three admit to having stolen something from an employer in the past three years (wonder how many more didn't admit it?). Second, there are always gray areas that you need to define. These gray areas might include charging meals to the company, cell phone usage and mileage reimbursement among dozens of others.

Alice Magos writes the online column “Ask Alice” for the Business Owner's Toolkit (www.toolkit.com). Magos advises that an anti-theft policy should minimally address the following: Removal of materials from business premises; right for the employer to require polygraph testing if theft is suspected (if this is legal in your state); establish an audit process to check for embezzlement; consider electronic surveillance; limit access to supply and storage areas; limits for use of company assets for non-company activities; spell out your intent to press criminal charges if an employee is caught stealing; a zero tolerance policy

Step 2: Checks and balances

Unfortunately, I have seen a lot of employee theft during my 25 years in banking. And if I could pinpoint one area that leads to most embezzlement, this is it. It is critical for you not to let any one person have too much financial control in your business, no matter how much you trust them.

A few years back, we had a client who had hired a very reputable Certified Public Accountant (CPA) from a local accounting firm to be his Chief Financial Officer. In fact, this particular CPA had done his audits for the firm for the past several years before he was hired. Not only was he well known in the community as a very competent accountant, but he was a family friend. The business owner was “not a numbers man,” so he let the newly hired CFO handle everything financial. After several years, it became apparent that something was wrong. The company was making money on paper, but the checking account was always near zero. The business owner asked his CPA firm to dig deeper in the next annual audit, and it was discovered that the CFO had stolen well in excess of $100,000 from the company over a period of about three years.

What lessons from this story can be applied to your toy business? Much of the check and balance process revolves around the checking account. It is advisable to have a different person receiving and balancing the checking statement than the person who writes the checks. You also should have a policy to require two signatures on checks over a certain dollar limit.

Other key suggestions include: periodically rotate responsibilities; as the owner, make it a point to understand the financial information of your business; review the bank statements before your bookkeeper does; watch out for red flags like missing checks, missing deposits, out of balance general ledger accounts and checks written to parties you don't recognize; require dual control over any cash; insist that all employees take at least one consecutive week of vacation each year; make sure your CPA performs an audit for theft during the annual financial statement preparation.

Step 3: Set an example

Some small business owners see the company checking account as a personal piggy bank. The business is viewed as an extension of the owner, which should give him/her the right to tap into the business coffers whenever funds are needed, business or personal. If your bookkeeper sees you using the company credit card to buy 50 bales of pine needles for your residence, it could send the message that it is okay to take money from the company. So, it is important to keep business and personal expenses completely separate to set the right example to prevent employee theft. It also is important to external constituencies according to Ed Mann, a CPA in Framingham, Massachusetts.

Mann sites three other key reasons to set up two separate accounts with clear delineation between business and personal expenses. First, it is easier for the business owner to track expenses for financial recordkeeping purposes. Second, lenders frown upon co-mingling. And third, the IRS will closely scrutinize a business owner who co-mingles business and personal expenses.

Step 4: Inspect your employees

The employee inspection process begins with hiring the right people. And it's not enough just to rely on a resume and a positive verbal reference. According to Crimescreen.com, over 40 percent of employee applications are falsified. It is advisable to use a prescreening service such as Crimescreen.com or a local employment agency to assist you in new employee searches. Tools such as background checks and drug tests will help you weed out potential thieves before they become employees.

While you might prevent some employee theft with good hiring practices, you also must inspect your existing workers on an ongoing basis. As noted earlier, your inspection process should start with the checkbook as you establish a system of checks and balances. And you can add an independent element by having your CPA do a periodic audit of dual controls and theft prevention. Having at least one random CPA audit of dual controls (as opposed to just having one at year end) can diminish the possibility of theft, since employees will know that they might be scrutinized any time during the year.

Another good way to detect potential employee theft is to closely monitor employee expense reports. Most employee embezzlement starts small and grows over time. If a worker sees that he can get away with padding mileage and other expenses, he might well move onto more aggressive theft measures.

Step 5: Practice zero tolerance

When you do catch a thief, you need to be ready with your response, and that response needs to be swift and decisive. It is important to realize that no matter how small an offense may seem, your reaction sets an example both for the offender and other employees. Therefore, I recommend a policy of zero tolerance if you catch an employee red handed.

If you want to avoid becoming a victim of employee theft, you must be vigilant. An active plan to combat embezzlement will let you workers know that they will be caught if they try to steal from you, and will diminish the likelihood of missing money in your toy business.

Author Information

J. Tol Broome Jr. is an EVP at financial holdings firm BB&T. His credits include the book Start Your Own Business.

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