Trust is a very good thing—at least in moderation. You know you should trust your “significant other” and, of course, your dog. But absolute trust should be very rare when it comes to running a business. It should be moderated with management and good internal controls.
Small businesses are the mainstay of the American economy. They provide a significant percentage of the employment for this community. Most are built on the principle that the owner is a person who has unique skills he or she uses to develop a business that provides its owner and employees a nice living.
But what makes a good entrepreneur doesn’t necessarily make a good businessperson. Often, the entrepreneur hires someone to handle the day-to-day office work—the “boring” stuff. This is where the importance of trust plays such a major role.
True stories
National statistics indicate that, given the right circumstances, 80 percent of the workforce will defraud their employer in some way—and there’s nothing worse than having someone steal from your bottom line.
Following are the stories of three local businesses. Each experienced a similar problem: The owners were skilled and focused on the interesting part of the business. The boring stuff was left to a trusted assistant.
First, let’s take the case of a well-respected medical doctor, who’s served the community for decades. He believed it was important to focus on the medical aspect of his practice; for ethical reasons, he didn’t want to be involved in its day-to-day financial aspects. So he hired an office manager who ended up working for him for more than 15 years.
During that period of time, the office manager became a very trusted person and a supposed asset to the business. She billed insurance companies, received payments and paid the bills. She also prepared the financial records and reconciled the bank statements.
The routine was for the office manager to write all the checks and then have the doctor sign them. But the manager began altering her own paychecks—from $800 to $1,800. It was easy, because the checks were handwritten and she left some room for the alteration. So, every payday, she got an extra $1,000. This went on, weekly, for years. The actual amount lost will probably never be known, perhaps $100,000 to $200,000. The doctor wasn’t making any money from his practice, but it hadn’t occurred to him that the reason was he’d been victimized by his trusted employee.
The second case involves a newspaper. The owner kept very busy with his part of the business. This time, the bookkeeper was a little more creative and used her personal debit card to defraud her employer. Specifically, she used the newspaper’s credit card machine. Instead of charging customers for subscriptions or advertising, the bookkeeper gave herself credits on her debit card as if she’d returned a purchase to the newspaper. This scheme ended up costing the business owner nearly $75,000.
The last case involves a produce wholesaler. As part of her job, the wholesaler’s bookkeeper was supposed to write checks to pay bills, reconcile the bank statements and manage financial records. But she wrote checks to herself and recorded them on the company’s computerized accounting system as if they were written to legitimate vendors. The employee also counterfeited bank statements to cover up the crimes.
The owner told to me he’d always made a good living from his business and he couldn’t understand why he’d been in a loss position for the last couple of years. Go figure. Fraud can turn a profitable business into a loser very quickly.
All three of these cases occurred in Marin and Sonoma counties within the last few years, and all three suspects were convicted. These certainly aren’t rare occurrences, and I could provide many other examples. Occupational fraud is on the rise—and it’s getting out of hand. It’s sometimes hard to detect, and it may be expensive to investigate. There’s also little chance to recover the loss.
Establishing trust
What can be done to protect the entrepreneur who loves his business and wants to continue to provide a good living for himself and his employees? Well, we’re back to trust again.
Internal controls can be established without making accusations or giving employees the impression you don’t trust them. A little discussion with your employees can drive home the necessity for the survival of your business. After all, it’s their living, too.
So if you want to focus on the interesting part of your business and leave the boring stuff to others, here are some tips to avoid being an embezzlement victim.
First, the most important thing you can do to detect embezzlement is have someone who’s not responsible for writing checks reconcile the bank statements. All three examples outlined in this article would have been detected within the first month had this procedure been followed.
Second, if your business is so small that you only have one person working the financial side, and he or she is trusted with the whole process, then you need to monitor or spot-check the process. You need to verify that deposits are being made and funds are being paid to the right people in the right amounts.
Last, if all checks must be signed by you, don’t ever sign them when they’re blank. This includes leaving signed blank checks with your employees “in case of an emergency.” Talk to your banker about other ways to handle emergencies.
