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

Entrepreneur, Jan, 1996 by Terri Singer

One advantage of owning a small business is you can get to know your employees well. Understanding how costly morale problems can be, you should always stay alert to potential problems brewing and take steps to nip them in the bud.

Management ethics refers to a company's code of morals and level of honesty, which is set by management and is demonstrated by example as well as by discussion. If your company normally deals with customers, suppliers and employees in ways that are unethical or seems concerned only with short-term profitability, this attitude will filter down to employees. The result? An increased probability of theft and fraud.

On the other hand, employees who see you returning overpayments from customers, telling the bank about errors made in your favor, and generally dealing fairly and honestly with others will adopt the same attitudes. Management sets the tone for ethics within a company. Remember, fraud is contagious, and many a business owner has taught young employees by example that dishonesty is acceptable in their business.

3. Internal controls. Internal controls are the procedures used to ensure the correctness and completeness of a company's accounting records, as well as to guard against fraud, theft and errors. These are what most people refer to as the "checks and balances" within a business. A weak system of internal controls is an invitation to embezzlement.

Ron Jennings has seen plenty of small-business embezzlements. The Corpus Christi, Texas, CPA recommends small-business owners incorporate at least the following minimal internal controls:

* Sign outgoing checks yourself.

* Open bank statements yourself. Examine the canceled checks; see if the deposits appear to be reasonable. Look for unusual debits, such as ATM withdrawals.

* Try to "segregate duties" between employees if possible. Segregation of duties means different employees perform the tasks of authorizing transactions, recording the transactions on the books and safeguarding the assets. For example, you might have separate people authorize bills for payment, write the checks and reconcile the bank account. Or you could have one person approve employees' timecards, another prepare the payroll, and a third distribute the signed paychecks.

Obviously, while segregation of duties works in some businesses, it has limited use in very small ones. If only one or two employees are involved in your accounting operations, you as the owner must take on certain responsibilities. It is essential that employees see you are involved in the financial aspects of the business. Employees steal only when they feel that they can do so without getting caught. By being involved in your company's financial operations, you reduce the likelihood that your employees will think they can get away with stealing.

If you truly cannot take the time to perform certain control tasks, you must at least give the illusion that you are watching over your company's assets carefully. This can be accomplished by opening the bank statements, questioning certain canceled checks and deposits, and asking occasional questions of employees to make it appear that you are more involved than perhaps you really are. Again, this "illusion" is no substitute for actual involvement in daily operations, but it's better than letting employees think they can steal without getting caught.