Embezzlement By Employee a Small Business Owners Nightmare

For the average small business owner, employee embezzlement is the pink elephant in the middle of the room to be ignored because:

1. They are in a perpetual state of overload with information
2. They can’t believe that their “Janie” could so blatantly sabotage them
3. They worry about insulting “Janie “by asking for information.
4. Probably, nothing is wrong, they just need to bring in more sales and besides they don’t have the money to hire a CPA to investigate.

An Embezzlement Conundrum

Question:

You discover your business has been embezzled!  Amongst all company employees, who is the most likely person that bares partial most responsibility for this crime?

If your guess is your bookkeeper, surprise – you’re wrong!!  Continue reading and then see if you get the right answer.

She is your dream come true.  She runs your office, pays your bills, sets up procedures, knows how to research all that you request, a good negotiator.  You come to rely on her support and now you finally have the time you have always wanted to go out and really GROW YOUR BUSINESS.ou get to the point that you are able to hire a bookkeeper to wrestle with all of the financial/human resource/administrative mumbo-jumbo that you have to deal with.  You perform “due diligence”, you check her out.  The “vibes” are good, so you hire “Janie”.

Years go by, your business is thriving and you are certain that “Janie” is so integral to your success that the thought of her being elsewhere is inconceivable.

Now the recession hits.  Business slows and so does your gross sales and profit margin.  When you review the numbers with “Janie”, she shows you how slowed sales have affected your bottom line and so you continue to struggle, certain that the recession’s end is in the foreseeable future and the good times will return.

Sure enough, the economy improves.  But you have noticed that your bottom line hasn’t.  And no matter how you run the numbers in your mind, you can’t figure out what the problem is.  Obviously you just have to work harder, or bring on more sales help, or something!

The weekend approaches and you are looking forward to “Janie’s” daughter’s wedding.  Everything is beautiful.  From the bountiful flowers at the church to the ice sculptures at the sit down dinner, you, your wife and son help “Janie” celebrate this wonderful event – you stuff yourselves silly between the horduerves, the 3 course meal and the before and after dinner drinks.

Then on the way home, your wife suggests that “Janie” must have dropped a bundle on the wedding and as you are beginning to put the numbers together, you are also wondering how she was able to afford this “grand affair”.  Over the years, you have gotten to know her pretty well.  She didn’t tell you about coming into any money – no one has died and you know how much her husband earns in his job.

You decide that this is none of your business and you have your own problems to worry about; only you can’t get it out of your head.

You start to think about your own numbers and decide to take the next Saturday in the office to review some paperwork.  You are hunting around “Janie’s” desk searching for a report she said she had completed when you notice a check at the bottom of a draw.  The check is made payable to ABC Material Company for an amount larger than you remember.  Now ABC Material Company is your preferred vendor that you have used for your widgets for many years but you can’t remember this specific check.  The signature looks authentic.  Even the endorsement on the back says ABC Material Company.  But because the hair on the back of your neck is standing up – something just doesn’t feel right.  So you continue to look through “Janie’s” desk – the bottom draw that is stuffed with paperwork that appears to be in no particular order (very unusual for “Janie” who is usually so organized).  You see an envelope stuffed with checks.  You peruse them to discover that they are all made payable to ABC Material Company.  You add the amounts in your head.  Your math has always been lousy but even so, you can see that the amounts of these checks are far in excess of the amounts you know you have spent with this vendor.  Certainly there is a good explanation – you will just ask “Janie” for an explanation.

Monday doesn’t get here soon enough.  You didn’t get much sleep Saturday or Sunday and you didn’t share your concerns with your wife.

Monday morning finally arrives.  “Janie” walks into the office with pictures taken at the wedding ready to regale you with them.  But you can’t wait another moment and you pull out the checks you have been pondering for these past 48 hours and ask her to explain these checks that you can’t remember signing.

Is it your imagination or is she turning a little pink.  She recoups and reminds you of how preoccupied you have been for quite some time now, so it is no wonder that you don’t remember.  But you have a meeting that you can’t delay.  So this matter will have to wait.  You leave for now.

When you return to the office, you look for the envelope with the checks.  You can’t find them.  You call “Janie” and she says that the envelope was on your desk when she left for the day.  Bottom line, the envelope has disappeared.

You call your accountant and relate the story.  He is scheduled to come in for his annual once over in about a month but decides to move it forward and perhaps take a closer inspection.

It is now one month down the road and it has been determined that so far “Janie” has embezzled at least $200,000.

You are STUNNED.  You don’t know what hurts more – the utter betrayal or anger that you are feeling.  You completely trusted her.  You spoke to her of things that you hadn’t shared with your own wife.  How could she do this to you?  How does someone come in every day and smile so completely knowing that she is, with every fraudulent check she writes, stealing the life blood from your family putting at risk your family’s welfare.  You wanted your money that she stole but just as importantly, you wanted an explanation that would make you feel less a fool.

OK, the tale has ended.  And what we are going to tell you will make you feel even more the fool!

You see, while it was “Janie’s” decision to deal with a short term financial squeeze with a panicked response – it was your decision to provide her with the tools to do so.  Rarely is a bad decision attributable to one person.  Usually, there are several that must accept their contributed negligence.

So if you want to at least partially blame someone – just look in the mirror.

That’s right the answer to the riddle at the beginning of this article is you – the business owner.

We are all human and we have all had moments of financial squeezes.  Most of us, however, do not have another person’s check book at the ready to make a short term, interest free loan, no questions asked.  If you think for one moment that this isn’t how it started out.  You are absolutely wrong.  When you hired “Janie” all those years ago, did she intend to steal from you?  You performed “due diligence” but if she had stolen from a former employer and it wasn’t reported (the majority of embezzlers are not reported to the police), then “due diligence” would have been for naught. Did “Janie” intend to repay the initial loan she made to herself all those years ago?  Absolutely!

But two things happened.  Her short term financial squeeze wasn’t and she noticed that you didn’t.  And so the distance from the first fraudulent check to the second is just one short rationalization.  The rationalizations become easier and before you know it, she has decided that the best way to repay all of this money is to start her own business which her husband will run and she will repay you with the proceeds.  But along comes another rationalization and her daughter begging her for the wedding of her dreams.

The names and dates have been changed to protect the innocent or should we say the small business owner who is too embarrassed to be identified.  The above story is essentially a true story.  In her words, she has been “to hell and back”.

I have told her that unfortunately it will indeed happen over and over again because, like her, most small business owners refuse to deal with the reality of human nature.

The ACFE (Association of Certified Fraud Examiners) and the SBA (Small Business Association) define a small business as a company with fewer than 100 employees.  For our purposes that is absurd.  You see, the single most effective method to prevent embezzlement, aside from you doing your own books, is division and alternating of labor aka more than one person dividing the various tasks and then alternating them which sets up a system of oversight.  But that requires the resources and staffing that most small businesses can not afford.

Auditors Inc defines a small business as any organization that has 1 bookkeeper thus eliminating the above method.

How does a small business owner protect him/herself from the human foibles of their one bookkeeper?  We have discovered certainly not by giving them an embezzlement detection manual (go to www.embezzlement.com), asking them to read it and set up spreadsheets, etc.  In reality it is very simple but you firstly have to have the time and secondly, you have to like working with spreadsheets and numbers.  That is probably not the majority of you.

The next problem to deal with is how your honest or dishonest bookkeeper is going to deal with the knowledge s/he is being audited when s/he knows that an audit is not required by your banker/investor.  You are afraid that she will take it personally and be insulted.  And the bottom line truth is that she probably will.

And lastly, how does the small business owner come up with the monies to pay for this service?  You have a fidelity bond on your bookkeeper?  Let’s see – that covers the first $50,000? And the probable balance of at least $200,000 (the average embezzlement), well you’ll take your chances.

You see when the above business owner said that she had been to “hell and back”, she wasn’t referring to merely the financial losses (many companies are forced into reorganization – our business owner was) but rather the toll on the culture of your company and what it does to your other employees.  You don’t think you will ever trust anyone again and nor does anyone else.

Whether or not a person will embezzle has nothing to do with how good they are at their job.

Embezzlement is an act of desperation – that is unless you have been targeted by a professional thief.

Your typical bookkeeper is an honest, well meaning person that seeks to provide the service they are being paid for.  Then along comes this financial squeeze that makes most people behave and do things that is completely contrary to their best interest.  They aren’t thinking straight.

That’s why embezzlement is completely unpredictable.

Isn’t that why you purchase insurance – because catastrophes are completely unpredictable – so you purchase insurance just in case.  You are betting that something is going to happen and the insurance company is betting that it won’t.

So Auditors Inc. should be happy when they find embezzlement just so that they can GLOAT – see – now aren’t you glad that you have us.

In fact, that is not the case – we are CPAs/Bookkeepers that prefer to do the everyday work of debits and credits but when we are approached to deal with possible small business embezzlement – we know that our practical approach to this subject makes it a little less onerous.

Theft has become so universal and HO HUM that truth takes on an almost surreal aspect.  You feel powerless, so you arm yourself with locks, security and all the insurance you can afford. You “arm” yourself against those you do not know, not realizing that it is necessary sometimes to do so with those that you do know.

Your inner sense of all that is holy mandates that you trust your “right arm” bookkeeper, so the reality is that you will probably not give this article more than 5 seconds.  We’re not asking you to, simply to put our company’s name and contact info in your Rolodex so that if you need help, it is readily available.

You are incensed that we have placed the blame – partially – for the embezzlement on you.  You didn’t steal.  “Janie” stole.  BUT “Janie” could not have stolen if you had “locked the door” to your assets.  So you must accept at least partial responsibility for this crime.

For more information please visit www.embezzlement.com