How to detect and prevent employee fraud

Oct. 1, 2009
Some basic measures to take to detect and prevent theft by your employees

Are you being robbed? In light of the poor economy, employee theft is on the rise. In a recent case, a bookkeeper plead guilty to stealing approximately $9.9 million from her employer, a small contracting business. Employee theft is a serious problem, and it's likely that you are very vulnerable, especially if a bookkeeper and a technician decide to work together. If they are up to no good, by the time they are discovered, you could be out of business.

No one wants to think that one of their employees would ever steal from them, but it has happened to many of us, including me. Sadly, we see it frequently. We have had several clients lose money to internal theft, and for some, it nearly destroyed them.

In many small companies, the bookkeeper and dispatcher are sometimes the same person. The reason this scenario is so important is because between technicians and bookkeepers, they are involved in the process of scheduling, fixing and collecting money. Since they are involved from start to finish, it is easy for them to rip-off the company and cover their tracks.

There are some basic precautions you can take to help prevent becoming a victim. You should also speak with your accountant for additional ideas to prevent employee theft.

Sometimes, otherwise honest people are tempted to steal due to financial problems. Some thieves have a history of bad behavior. Always perform a basic background investigation and credit check on each newly hired employee.

Make certain that you have a detailed employment policy manual. Hand out a copy to each employee and require them to sign a paper, acknowledging receipt of this manual along with a promise that they will read it. You can buy one that is prewritten, in MS Word format, and modify it yourself. Make sure it contains a clause forbidding “side work.” Be sure to include a “no dating” clause — don't let employees date. This makes it less likely for technicians and other employees to conspire. It also reduces the chances of losing two employees instead of one.

If you use an answering service, be sure that the answering service faxes or e-mails weekend calls to you. Make sure that you can account for every weekend call by matching phone calls with work orders and invoices.

Some customers will ask your technicians to come back later, off the clock, and perform the service or do additional work. Technicians and bookkeepers could claim that a service call was cancelled, yet still make the repair and collect for the work. They could use a company invoice or one of their own. Also, follow-up on each service call with a brief telephone call. This is particularly important if the service call was cancelled for some reason.

Make sure your invoices are numbered. Assign technicians invoices in sequential order and hold them accountable for missing invoices. Work orders should be used to schedule service calls. The work order should contain a number that is never duplicated. Invoices should include the work order number. Match work orders with invoices. Make certain that you have an invoice for each work order.

Be sure that your company uses purchase orders. Make certain that all of the items on the purchase order can be matched to the items sold on the invoice. Use a separate purchase order for truck stock. Purchase orders should be matched to bills.

Establish payment terms while scheduling the service call and discourage clients from using cash. Besides putting the safety of your technicians at risk, technicians could rewrite the invoice for a smaller amount and keep the difference. Credit cards are generally the safest form of payment and the fees are a small price to pay for security.

Inventory management is not something that the average small-sized company can easily manage and do cost effectively. With that said, inventory control still needs to be a goal for your company. As a general rule, once sales reach about $2 million annually, it's time to start thinking about it.

I highly recommend that you have each of your bank statements thoroughly reconciled by a third party who does not work in your business. This person could be your accountant or your spouse. Examine each and every cancelled check. Examine the “Pay To” signature and endorsement. Make sure that you recognize each. Match deposits against invoices. Cancelled checks should be matched to paid bills.

Study your credit card software. It's not hard to deposit credit card charges into other bank accounts that you do not control. Many of these programs have an audit trail. Turn it on. Be sure that the owner is the only person with administrative rights to the software. This will prevent the audit trail from being deleted and account numbers from being changed.

Good accounting software will have an audit trail feature. This feature records all of the basic things a user does within the software. Be sure that this feature is activated and never turned off. As with your credit card software, be sure that the owner is the only person with administrative rights to your accounting software. Depending on the software, this will prevent the audit trail from being deleted or important information from be edited.

Besides employee theft, there are other numerous threats that could cause your business serious harm. To help you protect your business from them, I have assembled a complete anti-embezzlement kit for you and its 100% free at:

James R. Leichter is a 25 year veteran of the mechanical industry. He has written extensively on management issues, taught seminars to thousands and served as an expert witness. He is the president of Aptora Corp. and may be reached at [email protected].

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