Paul K. Graser, CFE
Sr. Investigative Specialist
Edward Jones
St. Louis, Missouri
A company's most significant investment is typically in the people they hire. Companies spend time and money on training, but it's a necessary cost of business.
Usually, small businesses hire employees based on previously established relationships or referrals from trusted contacts. The extent of formal background checks varies from business to business. Small businesses often don't have the resources to investigate prospective employees as comprehensively as larger corporations do.
Despite the size of a company or the number of background checks performed, even the most honest employee can make a bad choice that could negatively impact the company. Fortunately, there are controls business owners can put in place to prevent employee fraud.
Cash Drawers
Skimming, theft and fraudulent sales or returns are typical ways employees can pocket extra money. Businesses must implement practices to monitor the drawer like:
- Hidden or not-so-hidden cameras.
- Requiring the worker to have to balance the drawer after each shift.
- A supervisor.
Expense Reports
There are other ways small businesses can suffer losses at the hands of employees. Expense reports provide an opportunity for employees to exaggerate their expenditures. Companies typically reimburse their people for expenses such as travel, entertainment, gas, meals, parking, tips and tolls. When using a corporate credit card, costs are easier to track. When there's no backup, things get more complicated.
Consider this case study: Company A was overwhelmed with expense reports, many for small dollar amounts. The small-dollar reports took just as many resources to process as the large-dollar reports. To remedy this, Company A instituted a policy that any submitted business expense under $25 did not require a receipt.
After implementing this policy, Company A saw more expense reports with requests just under $25. So, the leadership experimented to see what would happen if the threshold increased to $35. Suddenly, the accounting department saw an influx of claims just under $35.
Company B went the other direction and lowered the amount to $20. They witnessed reports just below that amount. In both cases, employees consistently reported expenditures just below the limit where the policy required a receipt, regardless of the threshold.
Cheating the Time Clock
Timesheets are another way some workers take advantage of (or steal from) their employer. Employees will either have someone else "clock in" for them if they're running late or hang around and not be productive the last 15-30 minutes before they officially "clock out." If there is no punch clock and employees record their time electronically, it's even easier for employees to fluff their hours. If every employee stretched his or her time by just 15 minutes, the company's actual cost would add up quickly. While you don’t want to micromanage, making sure employees understand you monitor time can have an ‘honest impact’ on results.
Second Set of Eyes
At Company C, a trusted accountant was viewed as a financial genius as she had worked there for more than 12 years. Her responsibilities included not only the accounts payable but also the receivables. When she took a vacation, she never had anyone cover her work.
When profits were repeatedly not as high as anticipated, the owner commissioned an outside auditor to take a closer look. The auditor discovered the accountant was manipulating the books, taking a cut for herself by sending funds to a bank account in the company's name. Moreover, she was the only person with signing authority on that account. She had set up a "ghost employee," as well as several "ghost customer accounts" to mask the transfers.
Evidence suggested she had been doing this for several years, starting slowly, but then increasing her take with each additional fake account. Ultimately, she served jail time for embezzlement.
Company C made the following changes to their accounting process:
- Separate the accounts receivable from the accounts payable areas and implement a secondary review for each area.
- Set up internal and external audits at random intervals to review the financials, including reviewing all payees.
- Require multiple authorizations and signatures on all outgoing financials (checks, wires, ACH, etc.).
- No employee can open additional business accounts without the owner's authorization.
- Owner reviews bank statements every month.
Companies have implemented whistleblower or ethics hotlines where employees can report suspicious behavior anonymously. Studies show these have varying results. While reports can provide businesses with new knowledge of the possible activity, the reports can also be biased, inaccurate and challenging to pursue.
Employees are essential and can make or break a business. They represent your company with their work ethic, morale and can impact public opinion.
Small businesses have a lot to consider when hiring the right people to ensure there will be a good fit in the culture and present the image the business wants to portray.
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