Stop, thief: are your employees robbing you blind? - embezzlement in small business

Entrepreneur, Jan, 1996 by Terri Singer

Ask the average small-business owner if he or she is concerned about embezzlement, and you'll probably get a response like "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."

If your answer matches any one of these statements, you're probably operating under a few misconceptionsumisconceptions that could prove deadly to your business. You may believe that if there were an embezzler in your company, you'd somehow intuitively know it. You may believe an employee's attitude and demeanor are sufficient proof that he or she can be trusted with large sums of money. And you may not realize how common embezzlement is in small businesses.

"Small businesses are at greater risk than large businesses for embezzlement and other kinds of employee theft," says Joseph T. Wells, a CPA in Austin, Texas, and chairman of the Association of Certified Fraud Examiners. "In fact, I doubt there is a business in America that doesn't have thieves working for it in some capacity."

Because embezzlement appears to be a "clean" crime, it attracts a wide variety of people, including many who would never consider other types of crime. For example, psychological profiles of embezzlers show they are more likely to be female, married, and span a wider range of ages than other criminals. They are typically employed with a company for four to eight years before they begin to embezzle. Frequently, the embezzler is "the last person you would suspect."

Causes Of Crime

Like any kind of employee theft, embezzlement is the result of motivation combined with opportunity. In the past, experts advised business owners to limit the opportunities for embezzlement through the business's internal controls (more on this later). While this is still an important prevention method, paying attention to employees' possible motivations may be just as critical. "We previously believed embezzlers were most often motivated by a true financial need," Wells says. "Now we're finding that the most common factor in embezzlement is employee dissatisfaction."

Employees who turn to embezzlement are usually people with major morale problems. They see an increasing disparity between their work and the owner's work, between their compensation and the owner's compensationuand they consider embezzlement a way of evening out that disparity.

WHAT'S AN EMPLOYER TO DO?

You can avoid countless problems by examining your company's practices in each of four areas:

1. Hiring practices. Ideally, you should begin thinking about employee theft prevention before hiring your first employee. In reality, though, first employees are usually hired at a time when the business is incredibly busy and little time is available to consider theft prevention. You may be so relieved to have some help, you don't even think about potential problems.

This is especially true when hiring a secretary/bookkeeper. You probably didn't go into business for yourself out of a love of record-keeping, and you may be overjoyed at finding someone to take over that responsibility. Because you are so eager to get this help, you may forego the normal background and reference checks and may give the new employee more responsibility than is prudent.

Take precautions when hiring. Begin by defining what it is you want in a new employee. Write a job description, and determine what education and experience are needed. Carefully interview several applicants, keeping in mind that character is more important than job skills. You can teach a person new skills; you can't teach good character.

Most people come to your company with good intentions, only to begin embezzling years later. However, some people who seek employment have crime in mind from the start. A job seeker may be someone who has embezzled in the past without being prosecuted. It's a simple matter to check on an applicant's employment history and to question their reasons for leaving each previous job.

If a former employer is reluctant to give detailed information, try asking, "Would you hire this person again?" Be alert to unexplained lapses in an applicant's work history. The applicant may be concealing a previous job to hide a problem.

When filling particularly sensitive positions, such as controller, bookkeeper or sales manager, consider performing additional background checks. These can include checking police records and credit histories. Many investigative firms can provide this information quickly and at a very reasonable cost. Considering the investment you make in a new employee, the cost of background checks is well worth it.

If your new employee will handle cash or do your banking for you, contact your business insurance agent about having the employee bonded. This is also known as employee dishonesty insurance; again, the cost is very reasonable.

2. Work environment. Promoting high employee morale and management ethics is critical to preventing embezzlement.