By Blake DuBose and Mike DuBose
Embezzlement rarely registers as a concern for most business leaders. Few talk about it or realize that it can happen to them, yet it is more common that most people think!
A business colleague recently shared a depressing story about a highly-paid bookkeeper with a long tenure at his company. The person was a strong spiritual model, friend, church leader, and a very nice person. She had also stolen large amounts of money from the business, paying her personal American Express bill directly from its bank account. Because of her position as bookkeeper, as well as the fact that the company’s seven credit card accounts made it plausible for a credit card bill to show up on the bank statement, she was able to do this undetected for two years.
Employees were stunned. For some, she had been the go-to person for counseling and prayer. Many equated their feelings after news of the theft broke to those after a death in the family.
We viewed this incident as an opportunity to assess our companies’ risks and tighten up financial controls. We contacted other business leaders, nearly all of whom had similar experiences or knew others who did. Most of these cases were handled quietly and never reported in the media.
A 2010 global fraud study conducted by the Association of Certified Fraud Examiners found that a typical organization loses 5% of its annual revenue to fraud and theft, with a median loss of $160,000. That amount could bankrupt many small businesses!
Detecting fraud is often difficult; in fact, the study reported a median of 18 months before fraud was discovered. Forty percent of the time, tips from customers, vendors, anonymous informants, or other employees led to the discovery. Other methods included:
- Management review - 15%
- Internal audit - 14%
- Accidental discovery - 8%
- Account reconciliation - 6%
- Document examination - 5%
- External audit - 5%
Many steal because of financial debts, greed, or unexpected expenses. They may live above their means, see the theft as a loan to be repaid, or justify it because of perceived mistreatment by the company. Attempting to get away with fraud can even be a game to some. Business consultant Dr. Rhonda Savage notes, “Managers are the usual culprits for the worst cases of fraud. It’s typically not the new-kid-on-the-block, but the long-term and trusted employee who ends up being the company crook.”
The possibility of theft is decreased if employees know that they may get caught; however, as Steve Sahlein, co-president of the American Institute of Professional Bookkeepers, reports, “Small businesses don’t always have the needed internal controls “to prevent fraud.
Frank Thomas, CPA, and other accountants recommended that business owners do the following to prevent fraud and theft:
- Conduct background, criminal, and credit checks on all potential employees.
- Use computerized financial tracking systems such as QuickBooks.
- Review monthly ledger printouts of all business checks that have been written, to whom, and in what amount.
- Distribute financial duties (reconciling bank statements, writing checks, making deposits, invoicing customers, etc.) amongst multiple people.
- Consider having an independent external audit conducted. Audits can ensure the books are balanced (not cooked!), proper controls are in place, and expenses are correctly documented.
- Business owners should open and review bank statements themselves, searching for any unusual expenses, checks out of order, suspicious payments, or missing deposits.
- Another employee should stamp any checks with “DEPOSIT ONLY” and make the deposits.
- Require checks above a determined amount to be signed by two individuals.
- Be aware of disgruntled or stressed employees who may be having financial difficulties.
- Establish a positive work environment with open communication, making it easy for employees to report problems such as theft.
- Charge most of your expenses to credit cards. American Express provides statements that are easy to review for unusual expenses (and, as a bonus, offers hotel and airline reward points).
- Compare client billings to the payments your company has received. Employees could possibly open secret accounts at other banks with your company’s Federal Identification Number, make deposits, and write checks from the account for personal use.
- If you have petty cash, maintain a close watch on it and document it well.
- Don’t trust anyone completely!
Another way to protect yourself is to insure your business against theft-related losses. Independent insurance agent Scott Moseley recommends that businesses carry liability and comprehensive business insurance policies that include fraud, embezzlement, and theft coverage. Most policies are limited to $10,000 for each incident.
Financial officers can also be insured or bonded against fraud. A $100,000 Employee Dishonesty bond costs about $300 per year, depending on factors like the number of employees and officers in your company, Moseley said.
If you uncover embezzlement in your organization, you have several options:
File criminal charges: First,you should be 100% certain that the employee is guilty of stealing (obtain a written confession if possible). A law enforcement officer recommended going directly to the solicitor’s office to report the theft. Individuals who are charged with a felony will have fewer chances to repeat their crime because many businesses conduct pre-employment background checks. The drawbacks of this option include the stress of going through a court case and the fallout that reporting the crime will have on the embezzler’s family members.
Allow the employee toavoid prosecution by paying back the money: A solicitor we spoke to recommended against long-term payments unless the thief can repay you quickly because it will weaken your case if you have to prosecute later. If you do seek restitution, have an attorney draw up the loan note. It should be secured with personal guarantees from the perpetrator and his or her spouse, with liens placed on their home and other assets.
Report thefts to your insurance company: Your insurance premiums may be impacted even if you recover your losses. Insurance companies will ask for proof of theft for any claims and will seek to regain any money paid out to you by collecting it from the individual who stole the money, either through repayment or prosecution.
Whatever course of action you choose should come after careful thought. You should seek advice from spiritual leaders, attorneys, accountants, law enforcement, and company leaders before making a final decision.
The bottom line: Running a business is not easy. Just when you think you have seen it all, there comes another nightmare like embezzlement. There is no foolproof way to stop people from stealing, but youcan make it more difficult for them to take your money!
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Blake DuBose graduated from Newberry College School of Business and is president of DuBose Web Group. You can view our published articles at www.duboseweb.com.
Mike DuBose has been in business since 1981 and is the author of The Art of Building a Great Business. He is the servant owner of three debt-free corporations, including Columbia Conference Center, Research Associates, and The Evaluation Group. For more articles, visit his nonprofit website www.mikedubose.com.
Katie Beck serves as senior technical writer to the DuBose family of companies. She is a graduate of the USC School of Journalism and Honors College.
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