To Catch A Thief: Protect Your Business from Internal Fraud

A convicted felon shares his story and the steps you must take now to protect your business from internal theft.

Written Oct 09, 2008, read 2416 times since then.

It was so quiet you could hear a pin drop in the normally chatty group of jewelry store owners. The presenter spoke quietly, even a bit nervously. His message, however, had everyone in the room mesmerized. The topic was employee theft, the venue a business performance group, and the speaker a convicted embezzler and someone known to one of the members. And although his former employer was not a jeweler, the circumstances and the impact of his actions hit close to everyone in the room.

Our speaker, whom I will call Ted, shared with the group how he managed to steal over $500,000 in the decade he was employed with a family-owned food supply company before he was caught and ultimately sent to prison.

He started as an hourly employee doing odd jobs, then graduated to warehouse worker, and eventually worked his way up to general manager. During the time he was employed, the company grew rapidly from a $5m to $15m company. He worked hard, often putting in over 80 hour weeks. As the owners' trust in him grew, so did his responsibilities. The more time he put in, the less the owners did. His stealing started with small items, with a few supplies here and there out of the warehouse. As Ted rose up the management ladder, his opportunities and boldness grew. He graduated to creating fake invoices, which in turn, were paid by real company checks. He had a partner on the outside of the company who helped cash the checks.

He was caught by chance when one of the owners happened to review the accounts payable. One of his fake invoices happened to be on top of the pile. The owner did not recognize the vendor. Curiosity compelled him to learn more. Things started to quickly unravel and eventually the magnitude of Ted's embezzlement came to light. A conviction resulted in a jail term of over 4 years, two of which were actually served due to good behavior. He is now, he says, a reformed man, who has created an honest and ultimately much more satisfying life for himself.

His key points to the group to prevent a similar occurrence in their businesses:

Trust no one; Verify and cross check everything
Don’t give any one person too much responsibility
Treat your employees fairly – pay people what they are worth
Stay involved in the business and with your employees
Don’t let anyone else sign checks for you. Don’t use signature stamps
Set a good example. If employees see you taking things (supplies, etc) out of the company, they’ll think it’s ok for them as well.
In addition to criminal background checks on prospective employees, do credit checks. Get them to sign over permission to do so on their employment application.
Institute a proper division of business functions between preparing checks, receiving payment, making bank deposits, signing checks, opening mail, and bank reconciliation.
Have a good, computerized bookkeeping system and competent bookkeeper and outside CPA, who conducts periodic security audits.
Know your costs and the benchmarks for your industry so you can spot things that are out of alignment.
Educate all employees on the negative impact of theft. Solicit their support of and involvement in the prevention and detection of theft.
Don’t give employee advances. Get rid of employees who need them. If they are that close to the edge financially, chances are they will be tempted to steal.
If you are a victim of embezzlement, by all means prosecute. But spend your resources on a good credit attorney who will be your best chance of finding where the money went – so you have a chance of getting back.

Learn more about the author, Lauren Owen.

Posted by Simon Siegl, Seattle, Washington | Oct 14, 2008

This is excellent caution for business owners and executives. The challenge is to maintain the discipline of the suggested actions.
Posted by Marty Grogan, Federal Way, Washington | Oct 18, 2008

A rather sad, unfortunate commentary...TRUST NOONE! Executives make Multibillion dollar deals on napkins. (Yes, I do have a copy of a rather famous one.) Don't let one shill destroy your faith in people or force you into complete paranoia. The current credit crisis occurred in part because of this kind of thinking--combined with greed, of course.

BTW, mixing personal finances and business expenses, i.e., on credit cards, invites not only a tax audit but inappropriately requires individuals to commit personal assets to company business. Shame on you.
Posted by Lauren Owen, Seattle, Washington | Oct 21, 2008

Hi Marty, Thanks for taking the time to read my article and post your comments. I really appreciate it. Please note that the "trust no one" was the advice of the ex-felon and "expert speaker" featured in this story. My personal philosophy is that most people are honest and do not steal. However, research shows that there is a very small group of people out there who do not have what you and I would call a conscience. These people will steal without a second thought. There are also, I believe, people who are basically honest, but, given the right circumstances (i.e. no controls and personal financial distress) might steal. Since it’s impossible to know for sure which category one’s employees might fall in, I follow the adages, “lead not into temptation” and “keep the honest folk honest.” In that case, surely having good controls is necessary and, in fact, appreciated by your honest employees. As for your comments about mixing business and personal expenses on credit cards, I couldn’t agree more. I do disagree on your comment on the credit crises, however. I think it is precisely because we trusted those in power to lend and borrow appropriately and ethically is why we are in the mess we are in. Less trust, more controls, and better regulation could have gone a long way to prevent the current financial mess.
Posted by Howard Howell, Seattle, Washington | Oct 25, 2008

Laurie... Thank you for sharing this story with the business community. Open communication like this is helpful to warn business owners about the unseen risks they encounter everyday.

I would like to put in a shameless plug for the Profit Mastery Program which can help biz operators in many ways avoid some of these risks.

And, speaking from experience, I would like to share the knowledge within this program so owners can spot things that need attention before it is too late. Now that you know the risk, protect yourself before you-too are duped. ...Howard
Posted by willsonn hard, kabul Afghanistan | Jan 02, 2011

Hi You said that in your key points Trust no one,if we trust to no body we will in constant mental pressure.and may be become a patient, In my opinion trust is necessary in business. curt