EMPLOYEE THEFT Embezzlers: big trouble for small businesses
Owners should divide duties and closely watch operations, experts recommend.
KNIGHT RIDDER NEWSPAPERS
About one in four owners of a small business is getting his pockets picked by his most valuable asset -- his own employees. A recent survey conducted for Intuit found that 24 percent of the 500 small-business owners surveyed have caught their employees stealing from them.
An embezzling worker loots on average $127,500 from a small business, according to the Association of Certified Fraud Examiners, which contends that companies with fewer than 100 employees are more vulnerable than larger businesses.
The association pegs the overall cost of workplace fraud at $400 billion annually. With the billion-dollar accounting scandals at Enron and WorldCom and a tight economy, more and more business owners are paying closer attention to what's going on inside their companies.
Employee theft can undermine a small business, but owners can take steps to safeguard their companies, advise CPAs.
Whether the person dipping into the till is a new hire or a trusted veteran, the business owner may be left questioning his or her judgment.
That was true in the case of Celeste A. Klopfenstein, who appeared Oct. 15 in Summit County Common Pleas Court in Akron for sentencing in the theft of $330,000 from the Tallmadge Collision Center.
"Celeste, you broke my heart," company founder Kenneth C. Dixon Jr. said.
Accountants documented 260 instances in which Klopfenstein stole money -- a little at a time -- since 1997.
Klopfenstein was almost like family, company vice president Robert L. Black said. He played basketball with her sons and worked out with her husband.
Because she was such a trusted employee, Black said, as a convenience he let her use a stamp bearing his signature when he wasn't around.
"I didn't want to give anybody else the authority to sign, so I just got a stamp and gave it to her," Black recalls with regret.
That in itself is a red flag to Mark Bober, a partner at Bober, Markey, Fedorovich & amp; Co., who conducts what are known as forensic fraud investigations. Bober doesn't recommend a signature stamp to begin with, but for owners who insist on a stamp's use, "keep it locked and secured," he advises, or allow only the person whose signature the stamp contains to control it.
That's one of the lessons Black said he's learned since Klopfenstein's thefts were uncovered. She used the stamp to obtain cash from the company's checking account. Owners who turn over responsibilities to trusted managers still need to keep an eye on what's going on.
"The owners have to play an active role in monitoring the internal controls of their business," said Dave McCarthy of Rea & amp; Associates certified public accounting firm in Medina.
Strong internal controls are the first defense.
That starts with segregation of duties. Don't allow the same person to send out bills and also collect the mail and prepare bank deposits, advises McCarthy. Have the receptionist open the mail, someone else prepare the bills and yet another person reconcile bank statements. If the business is small, the owner can fill one of those roles.
A simple step such as requiring every employee to take an annual vacation can help prevent embezzlement, McCarthy said. A substitute filling in for a trusted employee may spot questionable procedures.
Methods of stealing
Padded expense accounts, unauthorized purchases with a company credit card, invoices from fictitious vendors and ghost employees on the payroll are only a few of the ways that employees can get unearned compensation.
Dave Haramis, a partner at Haramis & amp; Roe Inc., which has offices in Barberton and Copley, Ohio, recalls a local case in which an employee scammed her company into paying her utility bills. She added her bill to the company's before writing the corporate check. Her employer didn't notice that the company's utility bills were just a bit higher than usual.
Owners should review invoices before signing checks, Haramis suggests. "They don't have to look at every single bill, just spot-check." Knowing that an employer is randomly checking work is the first step in deterring theft, he said.
McCarthy cautions owners against merely assessing an employee's integrity and deciding the person won't steal. "It's not necessarily whether someone is ethical," he said. "The goal is not to put them in a position where they can easily do something."
Internal controls need to be periodically reviewed and changed to deter inventive employees from finding shortcuts.
Haramis & amp; Roe also strongly recommends the use of computerized bookkeeping systems, which not only add a layer of fraud protection but also trim accounting costs. The computerized systems generally require a specific password for each operation while providing an audit trail that is difficult to circumvent.