Emerging Businesses are more Vulnerable to Employee Fraud and Theft - Orange County and Los Angeles Private Investigations Detective

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Employee Fraud

by Thomas A. Faulhaber

Emerging businesses are much more vulnerable proportionally to employee theft, and are much less able to absorb these losses than large corporations. Upon completing a major study of occupational crime, the Association of Certified Fraud Examiners (ACFE) in Austin, Texas reported that businesses employing less than 100 persons "were the most vulnerable to fraud and abuse" by employees. Emerging companies were the victims of fraud more often than large corporations, and the resulting losses were much larger commensurate with their resources.

This survey collected information on approximately 2,500 cases of employee fraud laid open during the past decade. Among the victims of employee fraud, smaller businesses had a median loss of $120,000 per occurrence. Large corporations (10,000 or more employees) sustained median losses of $126,000 -- a dramatically smaller proportion of their resources than that suffered by smaller businesses. The actual loses incurred from the cases compiled in this survey alone totaled approximately $15.0 billion.
The most costly employee-fraud problems are to be found in the real estate financing and manufacturing industries, with median losses per occurrence of $475,000 and $274,000, respectively; the lowest median losses of approximately $32,000 per occurrence are to be found in education-related companies. About 80 percent of the reported cases represented the theft of company assets, most commonly cash; the balance of the cases comprised such practices as placing business with an outside company in which the employee had a financial interest.

Joseph Wells, Chairman of the Board of ACFE, has observed that there are two general characteristics of emerging businesses that make them especially vulnerable to employee fraud:

First, because of the closer relationship between the owner/managers and their employees, "you generally have a higher degree of trust" that facilitates the fraud of the dishonest employee. The survey disclosed about 200 incidents in emerging companies where a "trusted" bookkeeper had simply stolen money from the firm, the scheme often continuing for many years. The report describes one case in which a bookkeeper stole $150,000 by salting checks drawn to himself in the piles of legitimate checks presented for the owner/manager's signature. Invariably laid before the owner/ manager at the busiest periods, reliance was placed on this trusted employee and the checks were not scrutinized carefully.

And second, the financial controls in the emerging business are generally casual and unsophisticated. The refined security and audit procedures found in the large corporation do reduce the level of fraud significantly.

However, the emerging business can employ some low-cost weapons to combat employee fraud. The most critical measure is to undertake meticulous background checks on all new employees. Resumes should be checked thoroughly to ascertain that the applicant did graduate from the schools claimed. Any unaccounted-for time in the person's past must be acceptably explained. To guard against bogus employment references, a prospective employer should never rely on the resume as the source for the telephone number of an applicant's previous employer.

The owner/manager of the emerging business must exercise some simple precautions to thwart employee fraud. Each employee handling money should be removed periodically from their job so that any malfeasance may not be continually concealed; this can be accomplished through required vacations and short-term job rotation. (The classic embezzlement is the handiwork of the trusted employee working long hours and never taking a vacation -- most thefts would surface if the employee had to take their hands off the job.) It is essential that other employment and business relationships of all key employees be known fully. Even family members working within the business should be subject to the same checks and controls as other employees. And an independent audit at least annually is an expense the smaller business cannot afford not to incur.

The emerging business often cannot survive the losses of significant employee theft. The owner/manager of the emerging business wants to be trusting, but must have his/her eyes fully open and not be gullible. Recognizing that even the "nicest" employees may be subject to temptations and failures of character, prudence demands that procedures and practices be established to preclude the possibility of any employee fraud. The survival of your business depends upon it!