It's largely a crime of opportunity, as even people who wouldn’t typically steal or defraud someone, will be tempted to do so if the opportunity is there and obvious.
Preventing fraud as a small business owner is yet another chore that the overburdened owner has to worry about, but it’s one of the most important ways to safeguard your cash, assets and perhaps your entire company.
Here are a few stories that we have heard from our clients and colleagues:
Back when I was working for my dad’s company, he hired a temp to fill in when I went on maternity leave with my daughter. He wasn't really paying attention to payables because it was something I had always handled. Then he got a phone call from the office supply place we used that they had had many more orders that we had previously placed and they wanted to thank him for the new business opportunities. Come to find out she was furnishing her house by having all the orders she placed sent to her house and the invoices emailed to her. He had no idea. He disputed it all and in the end the office supply company made her pay for them and took it off the company account. If the account manager hadn't made that sales call she probably would have gotten away with it.
Outsourced security guards, small company. They did a bad job of screening their people. Our office petty cash was stolen twice before we figured it out. Had my office lock re-keyed and made it policy they never got one. They were there to make customers in our location feel safe (evening classes).
Another job, cashiers counted out registers and made bank deposits. She was taking regular smallish withdrawals. I only figured it out when I saw her leaving for deposit run and asked who helped double check the process.Just to keep everyone safe, you know. Boss didn't like my suspicious attitude so decides to prove me wrong. He did a shadow day of the cashier and discovered her scam.
I have a client, small business, staff accountant embezzled $1 million by refunding her own credit card. There were a lot of "don't do this" lessons.
Client had the bookkeeper file and pay the monthly HST returns. She told him how much he owed and he would e-transfer her the money to pay the HST. About six months in, he signed into the CRA My Account only to discover he wasn’t even registered for HST...she’d been pocketing all the money!
I have seen this more than once. A situation where the cashier for fast food would only ring up half of their sales but call all the food back to be made and keep the balance of the money that was taken in. We had a similar situation at the local gas station. The young cashiers passed it on to each other. When someone paid cash for cigarettes they would every so often press void on the till, then at the end of the night pull that cash. Both cashiers would have to be in on it since they did cash out together. Lesson here is inventory certain things like that often, and have someone else do the nightly cash out.
I recall in a tour of the Canadian mint. Many years ago they caught a guy who wore his shoes several sizes too big and wore them home full of coins every night. They had made employees change their clothes for work but let them wear their own shoes.
I worked for XYZ Construction who ran federal projects and highway restoration. The Accounts Receivable clerk was embezzling for roughly 5 years. The Office Manager oversees the departments but never caught it. One plant manager was old fashioned and did not accept credit cards, so cash or checks only. She was manipulating his hand written totals and she was pocketing the cash. Still don’t know how much she got away with. She turned herself in but the police officer who took the case only gave her grand theft rather than embezzlement because she would get a lesser charge for her and her kids.
One customer was losing cash. I made suggestions for tightening controls and staff had to count in and out. The box was kept locked. It turned out that his son was helping himself - he was caught fairly quickly with the new process.
A company I do work for had 3 owners, one of the owners was getting invoices from a vendor, approving them and paying the invoices (which were not legit, no services provided) and then getting most of the money back from the vendor with a small kick back to him for the dirty work. The other owners caught wind when they started realizing they weren't making money on their jobs.
An expert on fraud prevention says the median fraud is$130,000 and the median scheme lasts for 16 months. This can have a very significant impact on a small business bottom line, and as you can see absolutely anyone can be guilty – a bookkeeper, a staff accountant, a business partner, an employee, multiple employees and even family members. The impact on the business is not just financial, but there is a deep sense of betrayal and mistrust when the theft is discovered, especially if the theft is by a close person.
1) Pay people a reasonable wage. This will definitely not prevent all fraud, but it’s a great starting point. The wages should be comparable or slightly higher than the going wages for similar work in the area, and need to be enough to ‘take the money off the table’. If an employee is making the least wage possible and struggling to make ends meet,they will be more incentive to find ways to mitigate their financial struggles.
2) Don’t let one employee do all the accounting and bookkeeping. The more eyes on the paperwork, the more chances to prevent and stop fraud and theft. At the very minimum have a division between someone entering the bills, and paying the bills. In our practice we often do indeed get tasked with both entering bill sand queuing them up for payment, but we always ensure the owner approves the payables before the money goes out the door.
3) Maintain internal controls – this sounds complex and serious, but at minimum it means that there are restrictions on employee access to financial data, cash or inventory. Have more than one person in charge of regular counts of cash or inventory, and ensure you or your accountant, and ideally both regularly review financial activity.
4) Rotate duties. Delegate roles to other staff in temporary situations such as vacation coverage. This encourages cross training enhancing the effectiveness of your team members, and also helps to reduce the chance that anyone has exclusive control over an area of responsibility for too long.