Emerging Businesses
Employee Fraud
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!