Good Workers Gone Bad: How to Spot Employee Theft

By: Greg Jones
In today’s economic climate, sometimes even the most steadfast employees who would never think of committing fraud against their employers are more willing to take unlawful risks in order to have some extra money in their pockets.

A 2009 survey conducted by the Association of Certified Fraud Examiners, found that U.S. organizations lose 7 percent of their annual revenue to fraud. Based on the 2008 GDP, this is approximately $994 billion in fraud losses. And employees accounted for 48 percent of those cases.

The majority of these cases happened in companies with fewer than 100 employees with median losses of $200,000. The most common of these small business fraud schemes were check tampering and fraudulent billing. Another alarming statistic comes from the U.S. Chamber of Commerce. It estimates that 75 percent of all employees steal at least once, and that half of these individuals steal repeatedly.

Here are procedures small businesses can implement to curb employee theft and fraud:

Division of labor: Never allow the same employee to have the ability to write checks and manage the books. Engage two employees in this task or outsource the bookkeeping element.

Job rotation: Have employees change jobs periodically; and don’t announce the rotations ahead of time. This will create a culture of self-policing by rotation of duties and will enhance employee satisfaction.

An increase in outstanding receivables could be a red flag: Look for an increase in the age of receivables as well as an increase in bad debt. Institute a weekly or bi-monthly aging meeting with supervisors and managers to discuss collections and their status.

Require monthly journal entry reports: Managers should do this to understand the fiscal health of their business, but also to question expenditures or journal entries that look out of line or unfamiliar.

Use preprinted checks: Require immediate reconciliation of bank statements and accounting for each check number.

Have credit card and bank statements sent to home address: This is a simple control. The business owner could then institute a routine of initialing each entry he/she approves and recognizes before discussing them with the bookkeeper.

Check signing meeting: All outgoing checks should be discussed, with accompanying documentation, as they are being signed. The check preparer and signer are the only attendees in this meeting. This is a great opportunity to catch fraud if it is taking place while at the same time going over expenses and payments being made to vendors.

Credit report evaluation: Just as you evaluate and track your personal credit reports, make sure it’s being done for your business. Look specifically for credit cards that may have been taken out in the company’s name.

Spot checks and audits: Develop a culture that understands that an audit of back office operations can be done at any time. Too often, owners look at the bottom line and disregard the system that is reporting that bottom line. As a security and accuracy measure, consider outsourcing some part of your internal systems (bookkeeping, payroll or both) to a third party. This allows for red flags to be raised without the offender’s ability to manipulate the system. The added benefit is a regular and naturally occurring audit system.

But remember, there is no “cookie-cutter” system that will completely combat theft and fraud. However, implementing processes and procedures that provide oversight and accountability will help deter the temptation that certain employees will have to steal from their employer.

Greg Jones is the CEO of Vienna, Va.-based BookKeeping Express,an international bookkeeping business that supports small to mid-sized companies.