Inside Job: Small Business Employee Theft Up - By Joe Duarte

Small business, already hobbled by a tough business climate, and tough to find credit, now has to deal with a new problem, that of rising employee theft. According to The Wall Street Journal: "Employee fraud -- from check-forgery schemes to petty-cash theft -- tends to rise during tough economic times, when workers are feeling financial pressure in their personal lives, experts say. And small companies are especially vulnerable because they often lack stringent internal controls to prevent fraud. Sometimes, managers at affected companies attribute lost funds to lower sales -- never even suspecting foul play."

The problem can be so bad that in some cases, insider fraud will bring a small business down, and the owners may never be aware that it was employee fraud that was the main cause, according to one expert's opinion in the Journal.

Here's an example. According to the Journal: "Karin Wilson, the co-owner and president of Page and Palette Inc., a bookstore in Fairhope, Ala., says she was burned by a trusted employee. Sales at the family-owned business began to slide in the second half of last year. By the holiday season, money was so tight the store ran out of some books. But it wasn't able to order more because vendors wouldn't extend the store any additional credit. Ms. Wilson, 40 years old, figured the vendors were reacting to the credit crunch."

And things got worse, as the week before Christmas, Ms. Wilson "saw a bill for the company's credit-card account. It said the company was months late on its payments. She began examining accounts and soon put together the pieces. Ms. Wilson claims the company's former bookkeeper, who had a personal credit card with the same bank, had used funds from the company's bank account to pay off her personal credit card. And Ms. Wilson says she kept paying her personal bills with company funds even after resigning in October."

According to the report: "Ms. Wilson also alleges that the former employee had written checks to herself instead of paying publishers for book orders. Payments were made to a local golf-club membership and for private-school tuition, Ms. Wilson says. She estimates she lost as much as 20% in potential sales during this past holiday season because she wasn't able to order enough books. In all, she alleges that the employee took about $150,000 over the course of about 2½ years."

And the bookkeeper? According to The Journal: "According to the Fairhope Police Department in Baldwin County, Ala., the person was charged with 25 counts of criminal possession of a forged instrument in the second degree. An attorney for the person declined to comment because of the pending litigation."

Conclusion

Fraud is clearly on the rise. Bernard Madoff may have been the tip of the iceberg, as the Stanford news in the last few days has hit the airwaves.

So what can small busines owners do? For one thing, keeping an eye on the business is more important than ever, as is a review of who does what in the business. For one thing, bank deposits, expenses, and payroll should be handled or supervised closely by the owner(s) or someone who is highly trusted, although the latter is no guarantee of safety, as financial problems are far too common these days to guarantee that anyone besides the owner can be trusted.

Of course, when the business is in trouble, the owner, as with Mr. Madoff, and now allegedly, Mr. Stanford, may not be trustworthy either.

Other things to look for, according to the Journal, include: being "alert to employees who seem to live a lifestyle that's beyond their means. Employees who guard access to accounting software or never take a vacation also should raise suspicion. Business owners should review every canceled check and look at the signature on the back, he adds, and they should review bank statements each month and check for unusual transfers."

Furthermore: "Once a business owner discovers any alleged fraud, he or she should keep quiet while building a team of people to help: ideally, an accountant and lawyer. Most employees are ashamed of what they've done and will agree to strike a deal to avoid prosecution."

And there is nothing like minding your own business as "Ms. Wilson has made fundamental changes to the way she runs her business. The stamp bearing her signature went in the garbage. Bank-account statements arrive at her home, instead of the business. Employees no longer have access to company credit cards -- all charges go through Ms. Wilson."

More News From Joe Duarte.