16 Jul How to Prevent Fraud in Your Small Business
Looking at the facts about theft by employees may have you feeling hesitant to trust anyone, but there are things you can do to prevent fraud in your small business. Keep reading to find out what you can do to protect yourself and your business.
Here is a little fact that is way scarier to me than Pennywise from the IT movies: Many corporate security experts estimate that 25 to 40 percent of all employees steal from their employers. The U.S. Department of Commerce (DOC) estimates that employee theft of cash, property, and merchandise may cost American businesses as much as $50 billion on an annual basis. That little tidbit is enough to make me break out in a cold sweat or wake me up from a deep sleep at night. Ab-so-lute-ly terrifying!
Sadly, fraud and theft by trusted employees occur with frequency in small businesses. I have seen it far too many times myself over the years. I know from experience that it’s not an anomaly; rather, it is something that we must expect. It is said that “things move at the speed of trust,” and I completely agree with that philosophy. It’s so important to take the time to build a team of A-players in your company.
Trust, however, is a two-way street.
Thieves are looking for opportunities to build trust with the owner of a small business in an effort to defraud them. Theft is most often committed by a trusted employee, one to whom the owner has abdicated their power. I have seen far too much of that over the past year. We are currently supporting four clients who have experienced 6-figure theft by trusted employees.
With help from our friends at Profit First Nation, we put together a RS Best Practices – How to Thward Embezzlement and Fraud for our followers. RS Best Practices – How to Thward Embezzlement and Fraud to download the sheet. It lists out the top 25 ways that embezzlers get their hands on your money. Based on our years of business experience, these are the ways we have seen theft appear in the financials:
Forging checks
The employee was responsible for writing paper check payments to vendors. There was a big stack of blank checks sitting in a drawer in the employee’s desk. The employee would go halfway down the stack to secure a check number that was out of sequence and then sneak it into their own life, writing a check to their credit card account. They did this over and over again, to the tune of over $1 Million.
Siphoning off cash deposits
This business had a lot of cash payments from customers: $20 for you, $20 for me; next thing they knew there was over $100,000 gone!
Faking vendor payments
This business owner did not like office work. He preferred being in the field, working with the laborers. He abdicated office responsibilities to an office manager who took care of customer payments and paying vendors. To be clear, it’s not uncommon or a “bad process” to have office staff responsible for collecting customer payments and paying vendors. However, you do need to set up a system with checks and balances in place. No one employee should have all the keys to the castle.
Want to find out how to set up good checks and balances in your system? Here is another guide for your viewing pleasure (click to download): “RS Best Practices – How to Not Totally Abdicate your Bookkeeping”.
Setting up fake employees
This business owner trusted a key financial employee so much that they did not research market rates for the position. The employee convinced her that she was such an “ignorant business owner” that the financial person had to be paid double market value. On top of that, the financial person required a “human resources expert” to come in as a contractor and fix all of the HR Violations that the financial employee told her were clearly inappropriate. This took place over the course of two years and cost the business owner $300,000 worth of service fees, for services with an estimated true value of around $80,000.
You have the power to prevent fraud in your business
Sadly, theft CAN happen in your small business, and even the smallest infractions can quickly grow into devastating financial losses. The good news is that you can protect yourself by implementing some checks and balances within your system. Know your numbers: get actively involved in and aware of your business’s finances.
Understand where every dollar spent is going to catch and address any issues right away. Lastly, get crystal clear on the job responsibilities of every role in your company, and do your research when bringing on a new team member. If you haven’t implemented these practices, don’t wait. Take the steps necessary now to make sure fraud and theft aren’t welcome in your business.
