None of us wants to believe employees in whom we have invested our trust are taking advantage or outright embezzling from our businesses, but the truth is many small business owners do fall victim to employee theft. It has been reported that 64% of small businesses experience employee theft. Businesses employing less than 100 people are disproportionately represented and can be hit the hardest with median losses of about $154,000 based on recent reports from the Association of Certified Fraud Examiners.
Sadly, those who steal from their employers often are the most trusted and longest tenured employees in the business. Employee theft comes in a myriad of forms. It might be slipping costly product off the shelves or creating “overtime” by purposely failing to complete assigned tasks during normal business hours. Then again, it might be an experienced receptionist voiding cash transactions and pocketing the funds at the end of the day or a practice manager purchasing personal items with your business credit card and hiding the theft in “office supplies” on your profit and loss statements. If this activity occurs day in and day out in your business, the losses can add up quickly.
The following are some warning signs suggesting employee theft is a problem in your business: your cost of goods sold percentage is excessive but you don’t have a lot of inventory on the shelves; expenses that don’t appear relevant to your operations or that are unusual or excessive show up on your financial statements; your revenue is growing but your cash flow is becoming very tight or your profit margin is shrinking; an employee appears to be living beyond his or her means; an office manager balks when you attempt to make changes to inventory management or decide to change accountants; and, unfortunately, the list goes on.
So why does this happen and how can you prevent losses in your business? Lack of oversight and effective controls typically are at the root of the problem. Couple this with an employee who feels he or she has become entitled to more than a salary or who has personal stresses and you have the perfect scenario for employee theft. You will be much less likely to become the victim of theft if you pay close attention to your business and implement strategies to reduce theft. The time frame between employee theft and detection reportedly is about 18 months and many cases are detected purely by chance. We’ve stressed in previous posts that to achieve the greatest financial success it is critical that any owner review the financial performance of his or her business every month. Now you have yet another reason to do so. Stay on top of your finances and don’t wait until year end to evaluate revenue and expense trends so you are more likely to catch discrepancies.
While by no means the only step you should take to spot employee theft, reviewing your profit and loss statement each month can serve as one internal control against fraud. Second, sign your checks—don’t turn this over to someone else. Similarly, strictly limit access to business credit cards. Have these and other business account statements mailed to your home and review them for unusual activity. Segregate duties in your business and switch things up. For example, have one employee order inventory and another review the billing and set up payment of vendor invoices. Have your cash drawer reconciled and deposits handled by someone other than the employees who are handling the money. Swap out each of these duties now and then. Your employees not only will have a heightened sense of awareness, they will become cross-trained. Finally, hire good employees, continue to gauge their job satisfaction and monitor their activities. Always perform background checks. Periodically check the pulse on employee satisfaction. Unhappy employees who feel unappreciated are more likely to believe they are “deserving” of taking something off the top for themselves. Insist all employees take their vacation time. Thieves want to stay on the job so they can continue to cover their tracks. That employee who wants to do it all and insists he or she needs no help even in the face of appearing overwhelmed may be embezzling. Install security cameras in the areas where inventory is stored and cash is handled. Lock up expensive product and limit access to it.
We have seen too many business owners fall prey to trusted managers and others who have taken advantage and embezzled. Don’t let this happen to you. Pay attention to your business and put in place some simple controls to ensure you keep all your hard-earned dollars. If you have suspicions, report your concerns to your accountant or other financial advisor and have an audit performed right away. If you confirm theft, it is best to report your findings to the authorities if nothing else to prevent the perpetrator from moving on and taking advantage of yet another business owner.
Carol Hart, DVM