Employee Theft & Fraud — Some Telltale signs – Part 2 of 2

Still probably not something you want to think about but still no small matter for small businesses.

The Association of Certified Fraud Examiners (ACFE), indicates the average U.S. business loses 5% of revenue to fraud and abuse each year.  In a recent study of 1,100+ fraud cases nearly one in four was $1 million or more.

5% of Revenue – On Average – Per Year.  That’s a startling fact!

ACFE also indicates that most costly abuses occur in organizations with fewer than 100 employees – it’s not just about Enron, Adelphia and the like – with the following organizational profiles:

  • Management ignores irregularities
  • High turnover with low moral
  • Staff lacks training

“Opportunity knocks” in those organizations with weak or non-existent internal controls.  When controls are lacking, when red flags that warn that something could be wrong are ignored, those that help themselves to the aforementioned 5%, notice – you can be sure.  Examples of red flags include, inadequate or no:

  • Supervision and review
  • Separation of duties
  • Management approval
  • System controls

Employees and management need to be trained and aware to spot these flags in order to monitor the situation and take corrective action as needed.  Nearly all large frauds started out as small ones.

Here are a few red flags in no particular order that come to mind  – this is only the tip of the iceberg – I don’t want to lull you to sleep – that might indicate there’s a problem:

  • Managers performing clerical duties
  • Purchasing agents that pick up vendor payments rather than have mailed
  • Rewriting records under the pretext of neatness
  • Behavior that’s markedly different with peers than managers or abrupt swings and displays of highly emotional behavior
  • Vendors without physical addresses
  • Missing shipping/ receiving / purchase order documentation or excessive (sometimes it just happens) photocopied documents when originals are expected
  • An employee with custody of assets, most typically cash and/or inventory who never takes a day off or vacation
  • Always in early and always stays late might indicate something other than the model employee you may think
  • Suppliers, shippers, etc. that were not competitively bid, even if they’ve been around forever
  • Lifestyle beyond his or her apparent means
  • “Complainers”
  • Gambling or drug/alcohol abuse
  • “Irregular” inventory counts or excessive/erratic inventory slippage
  • Your company has salable scrap but no scrap sales

    If you’re taken the time to read this far, perhaps you may be beginning to ponder, maybe I should have a professional review, so for you here’s a free tip.  In organizations that haven’t protected themselves against this potential problem with adequate internal controls the largest number, more than 34% are detected through tips!!  There’s a reason why Sarbanes-Oxley for publically traded companies focuses as much as it does on “Whistle Blower Policy”.

    Sidebar:  Some of you, I know better than others so I’ll save the details of my Whistle Blower Policy “discussion” with the CEO of a then successful, recognizable, publicly traded  financial institution whose interpretation was “different”.  Apparently The Securities and Exchange Commission “explained” it better a bit later.  In the words of the venerable Lawrence Peter “Yogi” Berra, “You can look it up” or maybe it was Casey.  Nearly $49 million in penalties and restitution, the CEO, an 86.5% shareholder, was banned from the industry.  Sometimes fraud is from the top.  No worries, you won’t find me mentioned anywhere.

    5% of revenue, on average, is not small potatoes.  At a bare minimum, you should have a discreet, confidential whistle blower policy and procedure in place that ideally is managed by either an independent third party or an independent member of your Board (you do have a Board of Directors, right?).

    If you haven’t otherwise considered a comprehensive, professional review, perhaps you should.


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