Bob Bitz, the owner of Preferred Commercial Floor Covering, a $2 million business in Canton, GA received a call from the County Sheriff in May of 2004. The Sheriff was tracking Bitz down because of suspected fraud on his Bitzís Citibank account. Bitz didnít know of any Citibank account. When the sheriff told him the address that was listed on the credit card statement, it sounded familiar. Bitz realized it belonged to his bookkeeper.
By June, Bitz discovered that his bookkeeper and her husband had been running a scam out of his office. They had filled out a change of address on the Citibank card, diverting it to their home, and then charged $70,000 on it. When the credit card bills came in, the bookkeeper paid them out of the companyís line of credit. For Bitz, the mess was just beginning. In order to straighten everything out and pay off the bills, he had to hire two lawyers and a fraud examiner, pay thousands in late fees to his vendors, cancel his health insurance, mortgage his house, and most importantly, reexamine the way he was running his business.
Small companies are frequently hit by employee fraud. Median losses for a company with fewer than 100 employees are $98,000, which is close to the $105,000 average loss that is typical at companies with more than 10,000 employees. Theft at small businesses often directly affects the reputation of the business owners. Because of this, it is imperative to have controls in place to protect and safeguard against fraud.
Having a proper accounting system is the first key. No single employee should be entrusted with all the financial tasks for the business. Businesses should have a computerized system that generates financial reports, and the owner should read them carefully every month. Cross-train so that a few people are familiar with the accounting system and make sure that everyone takes regular vacations, and that other employees cover for them when they are gone. Mystery shoppers can also be used as a good way to test cash handling procedures. Owners should carry deposits to the bank themselves and should consider using Internet banking.
Also, business owners should remember that longtime employees, even those who might be family members, friends, or neighbors, canít be entirely trusted. The ACFE estimates that 83% of employees who commit fraud have no past criminal history.
If you do suspect an employee of theft, you should try to figure out what happened before you call the police. Get an accountant to help figure out exactly what might have been lost. Also, check your insurance because some policies cover employee dishonesty. Be careful not to accuse anyone if you are uncertain as to what has happened. If the loss is sizeable, the police or your attorney can get things moving with a court case. A civil suit would be another option. Either way, you are looking at spending about 30 cents for every dollar you want to recover. You may want to put the employee on leave while the case is being investigated.
In Bitzís case, the repercussions of the fraud went beyond the missing money. Since 2003, the bookkeeper had been telling him that money was tight at the company, so tight, she claimed, that the company could not afford health insurance for its 15 employees. When Bitz cancelled his policy, he alienated his workers and sales at the company have dropped about 25%. The bookkeeper and her husband paid back the money they owed and received 15 years probation when the case went to court, but Bitz is still struggling to get his business back on track.