Embezzlement in Small Businesses

EMBEZZLEMENT IN SMALL BUSINESSES

It’s every business-owner’s nightmare; one of your employees is stealing money from you.You never think it’s going to happen to you, especially in a small company where you treat your employees like family. Charles Blincoe, owner of Kentech Machinery, learned his lesson the hard way. In 2007 business began to slow down. Blincoe and his son approached Linda Ireland, an office employee at the time, letting her know the two of them were forfeiting commissions to stay afloat but her job was safe. At the same time Ireland was feeding a heavy gambling addiction. During a time when the company was struggling, Ireland embezzled nearly $345,000.

 Embezzlement happens more frequently in smaller organizationstypically because one staff member has access to the accounting functions of the company. Bookkeepers have control over the cash flow of the company, writing checks, making deposits, balancing the monthly bank statement, writing payroll checks and even the filing of tax returns.

 Business owners believe they would intuitively knowif an employee can be trusted. After call, he or she knows how to run a business. A typical response, “I don’t have to worry about that because . . .

            …my employees are all good, honest people.”                 

            …we’re just a small company.”

            …my people have all been with me a long time, so I know whom I can trust.”

            …we don’t handle cash.”

 Profiles of embezzlers, according to Christopher T. Marquet with Marquet International, certain characteristics do stand out. She would be female, in her 40s working as a bookkeeper for a small business, non-profit, or government entity. She is a long term employee of five years or more,

hard-working and trust worthy. She would more likely have schemed on her own rather than involve co-conspirators over a span of four a half years.

 Which employees will stealfrom their employers? Embezzlement consultant, Ruth S. Crane of Auditors Inc., there’s an old saying that’s long been accepted in fraud prevention circles called the 10-10-80 rule: 10 per cent of people will never steal no matter what, 10 percent of people wills teal at any opportunity, and the other 80 percent of employees will go either way depending on how they rationalize a particular opportunity. The good news is that there is much a business can do to sway this 80 percent to their side.                                                                                

Pamela Sue Leichty, 56, of Rock Island, was sentenced to 3 1/2 years in federal prison for embezzling nearly $800,000 from the Quad-City Garage Policy Group where she served as senior financial specialist.
The embezzlement occurred over a period of three years and was not spotted during three audits of the agency's finances. Leichty told the judge she had "a severe gambling problem.”                                       

Embezzlers are creative thieves. According to:Smallbusiness.findlaw.com/ the warning signs include:

• Experiencing financial hardship: spouse unemployed; rising medical expenses
• Gambling
• Feel deserving: resent owner’s wealth
• Employee’s standard of living changes to a degree inexplicable based on salary
• Insists on doing everything; refuses help
• Doesn’t like the company’s CPA or Banker to make recommendations to automate or outsource
• An unusual drop in company profits
• Records are disorganized
• Unexplained changes in accounting records
• Unusually large or numerous credits to a particular customer
• Employee works late, on weekends and refuses to take vacations
• Documents are missing
• Bank deposits delayed
• Customers are complaining about having already paid a bill
• There are too many increases in past due accounts receivable
• Check amounts are altered
• Duplicate payments are made
• Bank reconciliations have too many outstanding checks
• Too many payments are made to individuals with same name or address
• Vendor’s addresses are the same as an employee’s address
• Accounts receivable and payables don’t balance
• Accounts receivable and bank statement listing of deposits don’t match
• The petty cash fund is disappearing                           

Business Owners are able to prevent embezzlementsby adding a few controls to the accounting process of the company. Bizmove.com/general/m6t1.htm tips include:

• Perform criminal and civil background checks
• If a former employer is reluctant to give detail information consider that to be a possible warning sign
• Consider running credit checks on prospective employees – financial difficulties  are more prone to fraud
• Make sure all employees who handle the finances are bonded
• Take precautions when hiring by defining what is expected
• Tell new employees you will take an active role in monitoring the banking and accounting records
• Purchase fidelity bond insurance coverage
• Require two signatures on checks – the more people involved, the less likely an embezzlement will occur
• Review all banks statements – have statements mailed to residence
• Compare cancelled checks to vendor invoices
• Never sign a blank check
• Avoid the need for petty cash; find alternative option to meet needs
• Separation of duties; no employee should be responsible for both recording and processing transactions
• Run irregularly scheduled surprise audits
• Submit to a yearly outside review by a third party, the expense is worth the security
• Regularly check for missing documents
• Use a “for deposit only” stamp on all incoming checks
• Personally look into customer complaints that they have not received credit for payments
• Set up a system whereby employees may report employee theft anonymously.
• Be clear with employees – zero tolerance for employee theft of any sort
• Write and distribute a company policy that outlines exactly what constitutes stealing
• Include management in the communication to emphasize no one is immune from termination
• Listen to your banker – fraud prevention services are available  –  be willing to pay  bank fees
• Require all employees to take a vacation; minimum of a week to allow time for the fraud to surface 

A positive work environment has been shown to deter employee fraud and theft. Open lines of communication, positive employee recognition, and fair employment practices will assist in the reduction of occupational fraud. 

Many of the dollars lost to small businesses might have been saved had business owners made the prevention of employee theft one of their top priorities. The simple truth to remember is that most employees will not commit fraud if they believe their company will detect it; that they will get “caught.” By establishing internal controls and letting employees know that you are vigilantly looking out for fraud, you can indeed deter many of your employees from attempting to steal in the first place. Considering the fact that the average median loss from small business employee theft is $100,000, prevention will always be cheaper than the cure.