If you’re reading this, you’re probably an electrical contractor. You’ve poured thousands of dollars into your dream, from licensing and insurance rates to overhead and equipment costs. Your commitment is evident, but are your employees equally invested in the success of your company?
An electrical contractor thought he had hired hardworking, trustworthy people. After all, many of his employees were either family members or friends. So imagine his shock when he learned his longtime bookkeeper had been stealing from his company for years to support her gambling habit. Total damage? Upward of $500,000.
The financial havoc the embezzler wreaked on the business and its owners has had long-term consequences. The EC needed to take out a loan to pay his employees’ salaries and eventually lay off some valuable people. Of course, he was angry. If not for the embezzler’s greed, he could have paid off his mortgage. Instead, he will have to work an additional three and a half years of 14-hour days before he can retire. Clearly, the financial repercussions of an employee’s theft can be lasting, and so can the emotional effects of such a betrayal.
Another EC’s wife took money earmarked for tax withholdings and went on personal shopping sprees. That EC’s son, now a business owner himself, keeps a close eye on the finances. He learned this lesson the hard way. Money is replaceable. Trust, on the other hand, is much harder to regain.
Consider the fraud triangle, a three-part model that explains how and why people commit workplace fraud. After all, if you want to prevent employee theft, you must first understand how criminals operate.
First up is pressure, which refers to a need or motivation felt by the employee who commits fraud. Next is rationalization, or the mindset that justifies the employee’s fraudulent behavior. Finally, we have opportunity, or the external circumstances that allow fraud to occur.
The only factor a business owner can control is opportunity. You may pay your employees handsomely, but if they need or feel deserving of more, then you never know who might steal from you. With that in mind, here are some easy steps to take to remove opportunities for fraud from your business.
For starters, segregate accounting duties as much as possible. The employee who receives the money should never be the one who deposits it. Sounds simple enough, but, in a small business, you may have to rely on just one employee. Whether you have to rotate duties or take on more of the accounting work yourself, it’s critical that one person isn’t responsible for so many tasks that he or she can commit and cover up fraud without anyone else knowing.
Another way to avoid fraud is to have all of the business’s bank statements mailed directly to your home or a P.O. box. This prevents potential manipulation, as you will be able to review every statement before your bookkeeper does. Keep an eye out for checks that are missing, out of order or written to unfamiliar suppliers. Review statements online. Remember, anything can be changed—from the payee to the dollar amount—in a company accounting system such as QuickBooks.
In an interview with the former office manager of a small business, I learned that she often made checks out to herself and changed the payee in the billing system. The business owner sat down with the CPA every Friday to review the downloaded reports. If they had pulled even a single check ever to match the reports, the office manager would have been caught. But they didn’t, and she stole $250,000 in 18 months.
In another instance, a business owner in Lebanon, Ore., saw a new Cadillac Escalade in the parking lot and overheard his assistant talk about her horses. He knew what he paid her and the lifestyle didn’t add up. Looking into company finances, he found $800,000 she had stolen. The glance out at the lot caused the embezzlement to unravel. If an employee is driving a car that doesn’t fit their paycheck, it might be worth digging a bit deeper.
Adopting fraud-prevention steps like these will send a very clear message to employees, namely, that you aren’t going to miss any wrong doing.
Tom Hughes, a former accountant who went to prison twice for stealing money from his clients, offered this advice at the Association of Certified Fraud Examiners’ Global Conference in June: Open your bank statements.
He explained that simply opening the envelope showed the business owner’s engagement, which was enough to dissuade this notorious fraudster from stealing from that client. In as little as six weeks (one-and-a-half cycles of bank statements!), Hughes would decide whether or not he was going to embezzle. It means that taking a few seconds to open an envelope could potentially save you hundreds of thousands of dollars.
According to the World Economic Forum, financial crime is a trillion-dollar industry, but these tips will put you ahead of the curve so your business doesn’t become another statistic.