Don't get burned by "sticky fingers
Don't get burned by "sticky fingers
"Business Owners Get Burned by Sticky Fingers-by SARAH E. NEEDLEMAN
MARCH 11, 2010, 5:41 P.M. ET
(Used, courtesy of the Wall Street Journal)
Entrepreneur Barbara Wein Allen used to have so much faith in her employees that she would loan them company funds to buy homes, cars and other big expenses. But that changed in 2007 when she determined one had stolen an estimated $250,000 from her firm, Multi-Point Communications Inc., a provider of Web- and audio-conferencing services in Birmingham, Ala.Employee theft hits small business particularly hard, but there are ways business owners can detect as well as discourage fraud. WSJ's Sarah Needleman tells Kelsey Hubbard what business owners can do to protect themselves.."I trusted her implicitly," says Ms. Wein Allen of the alleged thief, an employee who had worked for Multi-Point for more than seven years in a senior finance position.
Many small-business owners say they inherently treat their employees like family and therefore do without strict internal controls, security cameras or other defensive tactics. But fraud experts say the opportunity to steal with ease is simply too tempting for some workers to ignore, especially in bad economies. "More times than not, it's the most trusted person in the office who's perpetrating the fraud," says James D. Ratley, president of the Association of Certified Fraud Examiners. The Austin, Texas, trade group estimates that employee frauds at businesses with fewer than 100 employees cause a median loss of $200,000 -- $57,000 more than the median losses that larger organizations suffer. Even so, corrupt employees can in some cases go unnoticed for years. Ms. Wein Allen says she only discovered her business had been robbed when the alleged perpetrator took a vacation.
A review of the firm's bookkeeping system showed several dubious expenses had recently been filed and forensic accountants later provided further confirmation of fraud dating back to when the purported thief was hired. Ms. Wein Allen says alarm bells had never gone off because the money was stolen in small increments and the company, which employs 50 workers, had nevertheless been performing well. "Business was just that much better and we didn't realize it," she says. Of course, instances of fraud can also be spotted instantly. It's finding out who's responsible – or proving a suspect guilty – that can delay or prevent owners from taking swift action. Three years ago, Katherine Putnam ran into this problem when roughly $500 in petty cash was stolen from the West Springfield, Mass., manufacturing concern she co-owns, Package Machinery Company Inc.
It was clearly an inside job because the crime occurred after the company's doors were locked by an alarm with a pass code known only to employees, she says. A manager was quickly fingered as the perpetrator because soon afterward he stopped showing up to work and gave conflicting reasons as to why, says Ms. Putnam. But Package Machinery was unable to gather any evidence or recoup the loss. Now the company's six employees each have a unique pass code to its alarm system. "My impulse is to trust people unless they prove otherwise," says Ms. Putnam in explaining why the alleged culprit, an employee of just eight months, had the same access to the company as more seasoned employees. "He had started out really strong. I was disappointed."
There are signs business owners can look out for that might indicate fraud, says Mark R. Doyle, chief executive officer of Jack L. Hayes International Inc., a provider of workplace crime-prevention services in Wesley Chapel, Fla. An example is if a worker's lifestyle suddenly improves to a level that doesn't line up with his or her income. Another is if merchandise becomes misplaced because this could mean an employee moved it to where it could be more easily snatched by a friend. Meanwhile, Mr. Doyle says there are also ways business owners can discourage fraud, such as by installing an anonymous employee hotline and requiring all employees – including managers – to participate in inspection procedures. Employees should also be required to work in teams of two or more when handling money or inventory, he says. (For more tips on preventing fraud, read "How to Avoid Hiring a Bad Egg.") Business owners who suspect a thief is within their ranks should keep mum until an investigation has been completed, says the ACFE's Mr. Ratley. "If you tell them, you give them time to destroy evidence and think up a story," he says. What's more, this leaves open the possibility of catching a rogue employee in the act.
DunhamKaren Howard, owner of Dunham's Bay Boat Company Inc., helped set up a sting operation..Karen Howard, an entrepreneur in Lake George, N.Y., did that two years ago after receiving an unmarked envelope with a newspaper clipping that showed one of her 15 employees had previously been arrested for workplace theft. Ms. Howard, owner of Dunham's Bay Boat Company Inc., a boat retailer and repair business, already sensed that this person had been stealing cash and contacted state police for help. She says an undercover officer agreed to watch while a friend of hers posed as a customer making a $2,200 payment. The employee, who had been with the company for 10 months, took the bait and ended up with a jail sentence, she says. "She had stuffed the cash in underwear," recalls Ms. Howard, adding that this meant having to retrieve the money herself because a female officer wasn't present. She admits she didn't perform a thorough background check on the culprit, which might have saved her company from losing an estimated $30,000 overall at the hands of this person. "She was so friendly," says Ms. Howard. "If I didn't know what she had done, I would've believed her."
