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Wrong Strategy + Wrong People =
Fraud/Theft/Abuse
By Gary D. Zeune, CPAPretend you’re a small business
owner: you spend years of
hard work building your business, only to discover
a long-term trusted employee is stealing you blind. Don’t think so? The
average business loses 6 percent of revenue or $9 per day per employee to
fraud, theft and abuse. And I’ll bet 6 percent of revenue is material to
each one of you reading this article.
So what’s the best way to prevent someone from robbing you blind? Don’t hire
them in the first place. To screen out the bad apples, do a background check
on all job applicants. For example, people with financial problems are more
likely to steal, as are people with drug, alcohol and gambling problems. And
most common are employees having extramarital affairs. The money has to come
from somewhere. Think about this: If the employee will cheat on his/her
spouse, who they promised before God to be faithful to, what makes you think
they won’t steal your money to do it?
Many states’ laws require employers to make a clear and conspicuous
disclosure to an employee or job candidate that a consumer credit check will
be conducted. Informing job applicants up front of the check is also an
effective screening technique.
Even if you screen your employees, it's no guarantee against being ripped
off. There are three things needed for an employee to steal: need,
opportunity and rationalization, known as the "triangle of fraud."
Employees who steal often feel exploited or underpaid. For example,
employees often think, “They're paying me ten dollars an hour, and making
seventy off me.” It's a typical justification.
| Remember, Trust is NOT a Control. Trust is
a feeling, not a control. |
Business owners should also make sure there are strong internal controls in
place to protect the money. The same person should not handle incoming and
outgoing funds. One of the easiest, and zero or low-costs controls, is to
have your business bank statement sent to you at home so you can review the
transactions. Be alert for missing expenses (like not paying sales tax), a
preventive control. In addition, no matter how busy you are, review and sign
every check that goes out, a detective control.
In an all too common example, 63-year-old Carol Ann Huang, was sentenced in
federal court in San Jose, Calif., to six and one-half years in prison for
embezzling more than $11 million from her employer, a Los Altos businessman
who was a general partner in several business acquisition firms in San
Francisco.
She pleaded guilty in 2003 to one count of mail fraud and one count of money
laundering in connection with a scheme to embezzle $11 million from 1996 to
2002. Huang provided false payroll data to a processing company handling
payrolls for two of her employer's companies.
U.S. Attorney Kevin Ryan said Huang also cashed out her employer's life
insurance policy without his authorization, put up his Los Altos residence
as security on an unauthorized line of credit, and routinely forged his
signature on official papers and letters.
A defective compensation system will get you sued
Ever heard, “People behave the way you pay them to behave?” That is, your
compensation system is the primary ‘driver’ of how employees behave.
Compensation systems are supposed to motivate people to work, but defective
systems can drive illegal or dangerous behavior that puts the company at
risk of a lawsuit.
For example, long-haul drivers are typically paid by the mile, without
additional pay for hours spent waiting for shippers and receivers to load
and unload their trucks. It’s estimated that 80-plus percent of drivers
comply with the federal regulations. It’s an open secret in the trucking
industry that some drivers maximize their incomes by breaking the speed
limit and driving more hours than permitted by law.
If that pressure results in an accident, the driver, the trucking company
and, in some circumstances even the receiver, could face a multi-million
dollar lawsuit.
After a number of lawsuits for auto accidents involving delivery drivers,
Domino's Pizza Inc. learned its lesson about its compensation strategy.
About 10 years ago Domino’s had a 30-minute delivery guarantee. To encourage
drivers to get there with the pie, some stores paid drivers a bonus of one
percent for delivering a minimum number of pies on time, according to
testimony from one employee.
The system cost Domino's BIG bucks. In 1993, the company reached a $2.8
million settlement with the family of an Indiana woman killed by a driver
allegedly speeding to meet the 30-minute guarantee.
Later that same year, a jury awarded a St. Louis woman $750,000 in actual
damages plus $78 million in punitive damages. She was injured by a Domino's
driver who ran a red light. Rather than appealing, Domino's and the woman
later settled for an undisclosed amount. The company ended its 30-minute
guarantee a few days later.
Tips on avoiding fraud and theft and drive employee behavior that benefits
your company
There are a zillion ways to get employees to do the right thing. Here are a
few techniques:
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Conduct a background and credit check on all new employees (consult your
attorney first)
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Reward employees through profit sharing or other incentives
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Compensate employees fairly
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Separate accounting and check writing functions between employees and
owners
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Have the business bank statements sent to your home
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Add theft insurance to your business insurance plan
© 2006 by Gary D. Zeune, CPA, is the Founder of The Pros & The Cons, 10356
Wellington Blvd. Suite D, Powell, OH 43065. For questions, call 614.761.8911
or e-mail gzfraud@bigfoot.com. For 50+ articles on fraud and strategy visit
his web site www.TheProsAndTheCons.com.
1. 2004 Report to the Nation on Occupational Fraud and Abuse,
Association of Certified Fraud Examiners,
www.acfe.com/documents/2004RttN.pdf.
2. Gary Green, manager of business services, Owner-Operator Independent
Drivers Association, which has a nationwide membership of 113,000,
“Compensation systems at heart of many a court case,” Business First
Columbus, August 20, 2004.
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May/June 2007
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