To Catch A Thief

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Few things are more discouraging to a company owner than discovering that somebody you've trusted has had his hand in the till. Yet when you start swapping embezzlement stories, as I have with other controllers and chief financial officers, you begin to realize that there are limitless opportunities in most small companies for people to steal. Often there are few procedures and controls in place -- and for a reason. If you wanted to work in a big-corporation bureaucracy, you probably wouldn't have started your own company in the first place. Still, having no controls can be very costly. The fact is, embezzlers are drawn to a few weak spots that many small companies share. By concentrating on these, you can go a long way toward finding and preventing embezzlement in your company.

When managers are tempted to steal, there's often a shadowy accomplice: a messy set of books. I know of a controller in a manufacturing company, for example, who actually had the accounting records randomly stacked in two-foot-high piles around his office. He was the only person who could even hope to find anything there. One day when the president of the company was looking for something in one of the stacks, he came upon some suspicious-looking records quite by accident. When the dust settled, it turned out that the controller had given himself $40,000 worth of raises and bonuses over the course of the year.

Not infrequently -- and often appropriately -- "clean books" as a business goal become subordinate to more urgent concerns. But your books document the financial transactions of the business, and that includes criminal transactions. And, as with any criminal, the embezzler minimizes the chances of being caught if he or she destroys or hides the evidence, which is exactly what sloppy bookkeeping can accomplish.

Most embezzlers want to, and do, work alone. Someone, for example, who is completely responsible for every step of the weekly payroll can easily add imaginary employees to the payroll, increase wages, and tinker with payroll deductions for employee benefits and taxes. Payroll, accounts payable, accounts receivable, inventory, and investment portfolios are all wonderful targets for embezzlers. It follows, then, that if you segregate duties in some key areas so that what one employee is doing, another is checking, you'll probably keep temptation at bay -- it's unlikely that a potential thief could successfully enlist another employee as an accomplice. So, as a general rule, try to separate the bookkeeping for an asset or event from the physical custody of the asset or management of the event.

You'll also reduce your chances of hiring an embezzler if you closely check the backgrounds of candidates for accounting and managerial positions. In my experience, someone who has embezzled once is likely to be a repeat offender. And why not? Embezzlers are rarely prosecuted -- company owners are usually too embarrassed to press charges. Some say you'll never turn up something as dirty as embezzlement with reference and background checks, but I don't buy that. Usually a lot of people know about the problem when it's being investigated -- and when the embezzler is forced to leave a company. I'm thinking of the owner of a closely held research-and-development company who, in the process of dealing with an embezzler, discussed the problem with his law and accounting firms, corporate officers and directors, the bank, the investment bankers, and the investors. Plus everyone in the embezzler's department knew why she had been fired.

Now it's true that you probably couldn't make one phone call and discover that this person had been fired for embezzling. But the world's an awfully small place. Sordid news makes for great gossip, and sooner or later the news gets around no matter how quiet people try to keep it. You just have to dig a little harder than usual to uncover it.

If you follow these suggestions, it won't be easy for someone to pull a simple scam in your company. But to keep a check on exceptionally clever thieves, there's one more step you should take. Require your employees to take long enough vacations so that somebody else has to take over their responsibilities. Many of the embezzlement schemes are so fragile they require a lot of day-to-day maintenance, and they'll fall apart without it. A common example is "lapping" -- whoever handles accounts receivables skims cash off the incoming collections, and uses other collections to cover for it, in essence robbing Peter to pay for Paul.

There's another reason to require employees to take vacations. You may well notice some changes occurring in your cash flow, say, or maybe a cost line item will suddenly drop. The most extreme story I've heard along these lines was about the assistant manager of a barely profitable concessions business in Washington State, who had worked for years without a vacation or break. Then, sadly, he had a heart attack and was out for months. Profits quadrupled. Predictably, the owner took a more than casual interest in the change. He discovered that the assistant manager had several tricks for increasing his own income at the expense of the business: taking a little money out of the cash register, selling some of his own inventory instead of the owner's, and buying supplies from vendors who understood that his palms needed a little grease. The plan was simple, and it was successful for years: a little here, a little there, and never so much from any one place that somebody would notice. Until he was forced to take time off.

EMBEZZLEMENT CHECK

There are no perfect systems for thwarting an embezzler, but a few simple steps can help

You don't have to develop elaborate systems to find and prevent embezzlement in your company. Most schemes will be exposed if you simply do the following:

1. Keep complete financial records and books.

2. Be sure the person who is responsible for the bookkeeping for an asset or event is not the same person who has physical custody of the asset or management of the event.

3. Before hiring, check the backgrounds of management and accounting employees thoroughly.

4. Require employees to take vacations.