I was just reading an article about a local company who suffered a large loss due to employee theft which rallied the old internal auditor in me. Many small business owners think they don't need internal controls because they know all their employees and none of them would steal from them. While having a good relationship with your employees reduces the chance of theft or fraud, it doesn't eliminate it. The Association of Certified Fraud Examiners reported that in 2010, small businesses suffered losses of 5-7% of total revenue due to employee theft.
Theft from employees centers on what ACFE calls the fraud triangle: Motivation, Opportunity and Rationalization. As stated earlier, employees who have a good relationship with the owner/manager and who feel they receive adequate compensation are less likely to rationalize stealing from their employer. A good reason to have happy employees! Motivation can be due to excessive medical bills, a gambling problem, an addiction problem or other financial difficulties. Watching employees for signs of increased stress such as an increase in the number of personal calls received, changes in personal hygeine, changes in working hours (coming in early or staying late) or signs they are living above their financial means.
The last way to protect against employee theft is to limit opportunities. This is done by creating good internal controls. Even small businesses can set up internal controls as follows:
1. Having the owner demonstrate an active interest in the books and financial reports
2. Provide oversight and review of employees work
3. Segregating duties wherever possible
Duties to segregate include:
1. Separating the opening of mail (and logging payments received) from posting the payments to your accounting system and depositing them in the bank
2. Separating mailing checks with payments to vendors from recording the checks in the accounting system-even better is to use online bill paying where the bookkeeper can enter the payments into the system but only the owner can authorize the release of payment
3. Separating the entry of data into the accounting program from reconciling the accounts-the owner or an outside accountant should be reconciling checking accounts and credit cards
Other internal controls measures include:
1. Reviewing payrolls for reasonableness (is someone padding their hours?)
2. Requiring proper documentation for all purchases (invoices, receipts)
3. Having the owner sign all checks and maintaining control over all blank checks
4. Maintain a list of all fixed assets and doing a physical check periodically
5. Performing a physical count of inventory regularly
6. Requiring management approval for all credit memos or adjustments to accounts receivable
7. Reviewing the books for duplicate payments to vendors or increases in expenses which are unexpected
The ACFE estimates the median loss to businesses in 2010 from employee theft was $128,000 which can cripple some small businesses. Owners need to remind themselves that while they can delegate tasks to employees, they should not delegate their responsibility to supervise the activities. Reviewing the books can save your company so look at the financial statements regularly.