Employee theft can be fatal

Are your employees stealing from you? The answer is ‘yes’, so it is more a question of ‘what’ and ‘how much’.

Employee theft can be fatal

Recently a participant in one of our public workshops told me a horror story. Like many of you, he had worked really hard and managed to build a successful service business from scratch. It got to such a size that he needed some help with the accounting and finance ‘stuff’ and he employed a financial controller. 

The business owner was not financially literate and was pleased to be able to re-focus his energies on continuing to grow the business. Over the next couple of years the time-saving financial controller stole so much money from the business that it had to be put into liquidation.

There was an excellent SmartCompany article on employee theft some time back, so I will provide here some bullet points from the front lines of this ongoing battle.

STAY VIGILANT

Employees and systems:

1. Accept the reality. Say out loud “My employees are stealing from me”. Now make sure you have sufficient in-built protections to address the major risks and get on with running your business. You can’t cover every risk so focus on the major ones.
2. Your most trusted employees present a significant risk because of that trust – it provides them with opportunity and means. They will justify it in their mind somehow so it won’t seem like stealing to them. Your prevention measures (controls) must apply to everyone.
3. Reference check your new employees. Get it done professionally if you don’t have the time or expertise. Consider police checks for all as a matter of policy.
4. Have open conversations with your employees about all of this. You are not trying to create a climate of fear and distrust – rather openness, support and engagement. Thieves can steal from other employees too.
5. Where are you most at risk? Map your systems so you know where the risks and controls are, or are supposed to be. This doesn’t have to be fancy, just functional. And then conduct random and irregular checks, continuously.
6. Join forces with another entrepreneur and “theft audit” each other’s business. See if you can find the chinks in their armour. They can do the same for you.
7. Beware if you start having more frequent and unusual computer crashes, data losses, missing or failed back-ups, overdue reports and the like. It could well be an attempt to hide theft.
8. Make sure you are sufficiently financially literate so you can find and investigate the aberrations in your financial reports before they become too damaging. Your gross profit margin is a key indicator. If you don’t know why, find out, today!
9. Consider taking out employee theft cover in your business insurance pack. You might be surprised at how much comfort you can afford (but don’t be lax because of it).
10. Personally investigate every instance thoroughly and prepare an incident report to provide to the police. Report all incidents. Don’t let them walk away and do it again.

Specifically cash:

11. When you are dealing with cash, accept that it will be stolen no matter how good your systems are, so the objective is to minimise the losses. Cash theft is dangerous because if undetected it can cause severe haemorrhaging of the business. You don’t want to be the one that inadvertently funds an employee’s purchase of a new Porsche Carrera (value $250,000). This actually happened and there are many similar horror stories out there.
12. Review your cash systems for vulnerabilities thoroughly and often. Paper trails are the primary source of identifying cash theft.
13. Limit cash access to one person per area – one person per shop or per till or per safe access or per banking occasion. You need to be able to trace losses back to a person.
14. Look at your cash systems carefully and identify your biggest risks – palming notes directly from register; giving “accomplices” large quantities of change from the till (for example, tender $5 and give change for $100); voided and refund transactions in registers rolls etc.

Embezzlement/fraud:

15. Think about your systems – where are you most vulnerable? Where would an employee embezzler attack you?
16. Payment of suppliers and employees; beware the phantoms. Avoid giving one person end-to-end responsibility for payroll, payables or receivables – it just makes it too easy for them to steal. Separate the preparation and authorisation/doing roles. Rotate roles frequently where possible. How easy is it in your system to create and pay a ghost employee or fake supplier (fake bank account)?
17. Use a monthly budget (which you authorise) and compare your original to the actual results. Review irregularities.
18. Check all large one-off payments each month.
19. Check regular small payments each quarter.
20. Check the monthly bank reconciliations and ensure these are being done correctly and not hiding any sins.
21. Build reconciliation control checks into all your major systems, particularly those that are financial or feed the financial systems. Then you conduct ongoing reconciliations. If you don’t have the expertise to design and implement, get your external accountant to assist you or refer you to a forensic accountant for advice. Keep it simple.
22. It’s not just keys and codes for alarms and security that you need to worry about. People can get very lax about who has high-level access to their computer systems. And as many systems are monitored and serviced using remote access who knows where your former IT-guru with a good memory for codes is now residing in the world. Access passwords should be tightly controlled and used to clearly identify who is doing what in the system.

In summary, it’s all about prevention. Make your systems clear and obvious and talk about them with the employees. This will help deter the opportunist thief who probably accounts for a large percentage of theft incidents.

Good systems and processes will help to deter this person and save you time and money in investigations and reparations. The hard-core thief will not be so easily put off. For them you must remain vigilant in looking for the unexplained transaction, the departure from the norm (aberrations) and the break in your system. If you are diligent you will catch them early before too much damage is done.

Thanks to Damien James, owner and director of Aged Footcare Australia P/L, and also Miles Rozman, owner and managing director of Café Moderno for their candid and valuable advice gained from many years personal experience at the front lines.

If you are so motivated, please email me your personal “Top 5 Tips” or horror stories which I will compile and present periodically to remind us all to stay vigilant.

Have a happy and safe Christmas and New Year. See you for a great 2008.

Mark Robilliard and business partners Peter Frampton and Carmen Mettler started a journey to find a new way for anyone to ‘get accounting’ and use it in their job and life to create value. Accounting Comes Alive was born and now provides workshops all over the world using their unique and friendly Colour Accounting™ learning system that really does work, for everyone.

To read more Mark Robilliard blogs, click here.