Thousands of tiny Enrons are out there
By Marcus Green
(Louisville, Ky.) Courier-Journal
With the alleged misdeeds of giant corporations such as Enron, WorldCom and Global Crossing splashed across newspapers and ruling the airwaves, big business might appear to have the market cornered on cooked books.
Think again.
Small businesses are more susceptible to accounting fraud, according to a report by the Association of Certified Fraud Examiners released this year.
Businesses with fewer than 100 people are more likely to get slammed with fraud losses — a median of $127,500 — than companies with more than 10,000 employees, which registered average losses of $97,000, according to the 2002 Report to the Nation on Occupational Fraud and Abuse.
That's no surprise to Sam Day and Todd Logsdon, attorneys with Kightlinger & Gray LLP in New Albany, Ind. They lead seminars on how businesses can mitigate internal theft. Small-business owners often fail to create a plan to ward off fraud because they are focused on other matters.
"It's so hard to get a new business going and to get a new business successful, that security doesn't seem to be at the top of their priority list. And I think that's just natural," Day said. "What you want to do is make a profit and keep the door open."
Yet the door won't stay open long if the company is losing money to employee fraud. Nearly 50 percent of the time, the survey said, victims recover less than 25 percent of their losses through restitution, civil judgments, out-of-court settlements and insurance.
The most dangerous scenario? A single employee keeps the company's books, collects the money, writes checks and reconciles the bank account. That one person can manipulate a company's record of cash transactions — and cash is the asset of choice in 90 percent of the cases of asset misappropriation documented in the study.
Day recommends that employers separate accounting duties to ensure that several sets of eyes look over transactions.
"Even in a small business, you've got to have some kinds of checks and balances," he said.
A logical first step is to scrutinize the hiring process and make employees aware of the owner's stance on theft, said Wayne Stratton, a certified fraud examiner at Jones, Nale & Mattingly PSC in Louisville, Ky. Background checks are important, Stratton said, as are periodic evaluations of employee credit reports.
The credit history could alert an employer as to which employees are motivated to steal. In a common scenario, an employee falls behind on a credit card payment and takes money from the company with the intention of paying it back. He doesn't, his employer doesn't catch the theft, and the swindling begins in earnest.
In a small business, Stratton said, "you can't hire people to watch people." But employers who delegate responsibility to other staff members can maintain some control over each employee's job.
"Let's say that one individual is always making the bank deposit," he said. "Well, maybe occasionally it's a good idea to rotate some of those duties."
An employee who declines to take a vacation is a classic sign that something is wrong. Many instances of embezzlement revolve around the routine of a worker whose carefully rigged scheme would collapse if he or she took a few days off.
Bill Carroll, a certified public accountant with Strothman & Co. PSC, has seen one constant over the years: "Inevitably, it's the most trusted employee, the 30-year employee who's never done anything wrong," he said.
The Association of Certified Fraud Examiners suggests that small businesses institute at least three internal controls: Don't allow one employee to handle all cash transactions, have the owner review the monthly bank statement to look for unusual deposits or payments, and consider an annual review of the company's finances by a specialist in workplace fraud.
Catching employees who steal is often a matter of following a paper trail of deposits and withdrawals. But for small retailers, it can pay to have surveillance cameras installed.
Stan Moore, a partner in MidAmerica Security Systems Inc. of Clarksville, Ind., which installs closed-circuit television systems for small businesses, industrial sites and commercial buildings, cites the example of an owner of several sandwich franchises who is concerned about security.
"The common complaint is, 'Well, I can't be everywhere all the time,' " Moore said. "Well actually, now you pretty much can be, because you can remotely, digitally access your different facilities."
