Taking a pro-active stance in recognizing and understanding Occupational Fraud and employee theft within your business or organization ©

By Barry J. Webne

No business or organization is safe from the risk of Occupational Fraud and employee theft, from the largest of corporations to the smallest of churches. Financial predators can be anyone or can live anywhere. As a business owner, taking a pro-active position in protecting your business from this type of individual or crime is essential. I’ve had some experience in this area, and I firmly believe that if I walked into 100 small-businesses today, I could find extensive internal control and protection shortfalls inherent in an overwhelming majority of them. The situation is desperate. In short, as business owners, if we don’t take a pro-active stance in this respect, it will only be a matter of time before that individual perpetrator steals the assets from our business, along with everything else that we’ve worked hard to establish.

I always ask myself the question; “How many businesses or organizations have failed, or have filed for bankruptcy because of a fraud/theft scheme that went undetected?” I’d have to say that there are more than a few; many more than we believe, or care to admit. With the economy struggling as it is today and as it’s been since the 1990’s, nothing can be taken for granted. Any employee within your business or organization can be a financial predator. You just don’t know, and the sad part about this fact is that more than likely you won’t know, until it’s too late.

I remember speaking in Birmingham, Alabama, a few years ago, and as my presentation was winding down, one member of the audience asked me how I went about perpetrating my crimes and embezzling from my employers. I gave a few examples and then told them one of the things that I’d do would be to wait until my boss was in a hurry and ready to leave the office. On his way out, I’d ask him to sign a few “blank” checks. I’d tell my boss that I was sorry, but things were hectic and I needed his signature on the stack of blank checks before he left. He happily complied every single time, simply because he trusted me, without question. As I’m saying this, I notice a man in the audience get up out of his seat and literally run out the door of the banquet room. I thought he must have had an emergency or something. Much to my surprise, I found out later that he was a local attorney, and that morning his office manager pulled the same blank check “stunt” on him. I have no idea whether those blank checks that he signed ended up being for fraudulent purposes or not. What I do know is that this scenario is common, and it’s time that we put a stop to this foolishness.

Every business owner in our nation today possesses the tools and ability to be an energetic, creative and strategic leader. You don’t become a successful business owner without possessing these qualities. As business owners, we always seem to be able to sufficiently address our competition and any other items that we face on a day-to-day basis, so why can’t we keep our own house in order? Why do we keep leaving the door unlocked? That’s a question that never ceases to amaze me, and unfortunately there are no clear-cut answers to this absurdity and carelessness.

In both my crimes, each employer had the ability and knowledge to put measures in place to substantially mitigate the risk of this type of crime from occurring. My employers could have easily removed the “opportunity” that existed within their businesses; taking it out of the equation by installing effective internal controls. If this had been the case, more than likely, the risk of detection and the risk of my getting caught committing the aforementioned crimes, would have increased to the point where that risk would have substantially outweighed the perceived benefit. Unfortunately, this lack of risk plays out daily in small-businesses and organizations throughout our nation, much to the demise of business owners.

For business owners, there is one unpredictable factor in this equation; the employee/perpetrator. We can never know what’s going through an employee’s mind; what financial pressures that he/she is facing at home and what bills are outstanding and/or past due; mortgages, car payments, medical bills, college tuition, etc… Basically, what financial pressures that individual faces on day-to-day basis. With inflation increasing at a greater rate than most salaries, employees can easily be backed into a seemingly desperate financial corner, and you as a business owner will never know. You will never know the pressure your employees face, especially those members of your accounting staff who you should be most concerned about, because they are supposed to act as a first-line of defense against any such incursions and defalcations.

Getting inside the minds of our employees is next to impossible, and may not be the initial answer. There are many reasons why people do what they do, and as business owners, if we sit here and attempt to analyze these actions, we will completely “miss the boat”. In my particular case, I embezzled funds because I was living outside my means. My employer would have never known this because I presented myself as cool, comfortable and confident. The problem was, that when I embezzled enough money to meet my needs, I continued, much as an alcoholic or drug addict. Hence, this is the reason why so many of these fraud schemes are long-term in nature. The thrill of “free money” and a “bottomless” bank account has an unexplainable allure. Usually, the more a perpetrator steals, the more he/she spends, and subsequently the more he/she is pressured to steal to satisfy their habit, resulting in a destructive spiral for the business owner, the business and the perpetrator.

What I’d like to convey in this article is the reality that exists in businesses and organizations today, and that is the first step in recognizing that there’s a problem. Occupational Fraud and employee theft crimes are a threat to the existence of your business, and like it or not, this type of crime is here to stay. You will never, and I mean never, be able to stop a financial predator from committing this type of crime unless you curtail the “opportunity” that exists within the organizational structure of your business.

When I talk about curtailing the “opportunity”, in short, I’m saying stop leaving yourself and your business vulnerable and open to attack from a perpetrator. Guard your business as if it were your child. This is where we often fail, because we tend to have a lot of irons in the fire at any given time, and we concentrate on the most important ones, those usually being profitability and competition. We tend to look at the “big picture” and leave the details to our employees, which in the end could spell disaster.

Over the years, I’ve heard several business owners say, “I don’t know how things work around here, that’s why I pay people”. That’s really not a bad attitude to have, if you can back it up with some leverage. As a business owner, you must absolutely and completely understand the workflow, the paperwork flow and all the tasks that take place on a day-to-day basis within your business or organization; especially in the Accounting Department. This is essential; for to be able to control the outcome of the fraud game, you must know and understand the rules of the game, the workflow and paperwork flow; the players of the game, your employees; and the playing field, the work environment. There is nothing wrong with turning tasks/projects over to employees, as long as you completely understand what you are turning over. That’s one of the primary errors that owners make today. They don’t understand, and in a lot of cases, they don’t want to understand the details.

Let’s stop thinking about why people do what they do – we can’t control that. We must start thinking about controlling the “opportunity” that exists within the framework of our business or organization. What does “controlling the opportunity” mean? In essence, I’m referring to placing internal controls within the organizational structure of your business or organization to prevent Occupational Fraud and employee theft from occurring. These internal controls can be as simple as having the monthly bank statement(s) mailed to your home or to an off-site location, and then reviewing those statements for accuracy and legitimacy, before turning them over to your accounting personnel for reconciliation. Another way to control the opportunity is to segregate duties within the Accounting Function. In other words, divide the tasks such that the same person that issues Accounts Payable checks is not the same person who reconciles the bank statement(s) at the end of the month. These examples are simple to implement and understand, they cost relatively nothing and the payback is immeasurable. These are logical, common sense protective measures that we all too often forget about. Although we can’t accurately predict if the measures and controls we implement will stop a fraud scheme from occurring, we can be assured, that if we do nothing to protect our businesses, eventually, we will have nothing left to protect.

So what have we learned here? First, Occupational Fraud and employee theft is real and is a growing problem in the business world today. Second, we as business owners must realize and understand this threat and act in a pro-active manner to prevent this type of crime from taking place within our businesses and organizations. Third, by being cognizant and paying attention to the actions of our employees, as well as the paperwork flow within the structure of our businesses, we will be in a better position to be pro-active and thwart this criminal activity, now and in the future.