Just when small business owners think things cannot get worse in this bleak economy, many are learning another harsh reality:  when economic conditions turn bad, employee theft and fraud increase.

Certainly the economic downturn has sparked a renewed sense of responsibility in many people who are grateful to have a job and who want to perform their jobs to the best of their abilities to help their companies ride out this storm.  But the ugly flip-side is that this storm has also widened small businesses’ vulnerability to employee theft, fraud, and embezzlement.  Employee theft strikes small businesses at an alarming rate even in the best of times, but in challenging times like these, it can sink a struggling business in the wink of an eye.  Scariest of all is that you could be experiencing serious internal theft problems in your own business and not even know it if you automatically assume that your profitability is down entirely due to current economic forces.

The reality is that many small business owners focus resources on their products and services and keep costs down by cutting corners on things like establishing solid business accounting practices.  The “why” and the “who” of employee theft are subjects for entire seminars of their own:  suffice it to say that all kinds of people do it, and for a multitude of reasons.  It’s the “how” of employee theft where small business owners have their best chance to prevent it, and to minimize their exposure it when it does happen.  To survive these lean times, every small business needs to implement a manageable and effective internal theft-prevention program that includes tight controls on its financials. 

Sure, the back office stuff isn’t sexy.  I’ll grant you that it can be mighty dull and pedantic stuff.  But that dull back office is the incubator that will nurture – or destroy – the nest egg you’re working so hard to grow.  The good news is that a tight theft-prevention program for a small business can be pretty straightforward to design.  Here are the basics that it should cover.

• Formalize procedures.  Address all employees handling financials and inventory and all circumstances where that takes place.  Make certain that every involved employee knows his role and responsibilities, and have them read and sign the procedures.
• Formal procedures should be thorough but streamlined enough not to be onerous.  Simple, logical procedures have the best chance of being followed, and are the easiest to monitor and control.
• Know your areas of vulnerability and target them. 
• Strike a balance between trusting your employees and assigning them accountability.  Trust is a wonderful virtue and one that will get you far, but remember that trust doesn’t have to be inconsistent with logic and reason.
• Seek out the advice of an experienced auditor or business expert for industry-specific areas to cover. 
• Include basic checks and balances.  If one person creates the payroll, have a different person sign the checks.  If there’s only one bookkeeper, then guess what – yes, the owner needs to be that other person.
• Check criminal histories on all employees who you plan to handle financials and inventory.
• Review bank statements and financial reconciliations regularly, without exception.
• Have bank statements and financial reports delivered to an address outside the business to which only the business owner has access:  home perhaps, or a P.O. Box.
• Proactively monitor performance of procedures regularly.  No news is not necessarily good news.  Become attuned to explanations of diversions from procedure.  If an employee misses making a bank deposit when you expect it to be made, require not only an explanation but documentation each and every time and verify it each and every time.  Don’t wait for the mole hill to become a mountain.
• Don’t delegate responsibility for writing or signing checks.  If that’s not practical, establish a hierarchy of signors and co-signors based on check amount.  And dump the signature stamp – it’s a disaster waiting to happen.
• Hire an auditor to verify your procedures, financials, and inventory at least once a year.  The reviewing auditor should be a different person than the one who provided advice on setting up the original procedures.

A good list of basic do’s and don’ts can be found here.

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