“Employee theft may cost American businesses as much as $50 billion on an annual basis, 30% of small business failure is caused by employee theft and an estimated 75% of all employees steal at least once.” – Statistics from The US Chamber of Commerce in an article in the Wall Street Journal.
What’s your stance on employee embezzlement? Do you have that, “it will never happen to me,” attitude? Have you been the victim of employee theft and now think everyone’s a crook?
Internal controls are the crux of avoiding theft. They are your alarm system protecting your valuables. But more importantly, they let people know that you are watching. Think about the largest most robust home alarm system you can imagine. Know what the most valuable, irreplaceable piece of that system is? That 18 cent, little plastic sign that they hammer into your begonias in the front yard. It tells the world, “I am watching you and I’m going to make it difficult for you to rip me off!”
While most people yawn at the words “Internal Control”, they are fascinated by theft. I can tell tons of stories of creative, brazen thieves and how they’ve stolen from companies. There’s the restaurant with the chef that would hide cases of frozen lobster tails under the liner in the trash can outside the kitchen door which they would come pick up much later after the restaurant was closed. There’s the tale of the plumbing contractor whose superintendent did side jobs all weekend with the materials in the company truck he was allowed to drive home at the end of the work week. There’s the oil distributor whose management filled the tanks with water leaving only an inch or two of oil on the top. Oil floats. So, when the auditors came to confirm the inventory and they inserted the dipstick into the top of the tank, the tanks appeared to be full. Only when they pulled a sample from the bottom of the tank were they able to determine there was not much oil in the mix. And many, many more…
Controls are all around you as a consumer: the fast food restaurant that will buy your lunch if you don’t get a receipt, the retailers that require the same credit card in order to credit back a purchase, the warehouse store that checks your cart as you leave. The warehouse store example is intriguing if you think about it – they are doing it backwards. Every time I have wheeled my overflowing cart to the door, the gatekeeper confirms that what is on my receipt is in the cart and not the other way around. Well, Thank You Costco!, for making sure I got everything I paid for. But, I don’t think that was your intent – the folks at the door should be confirming that the 50 gallon drum of potato salad in my cart was actually paid for and not the other way around.
I once worked for a brief period in a manufacturing firm and was able to determine after about a day and a half that the accounting manager was embezzling. Aggressively embezzling. She was paying herself her bi-weekly salary every week, cutting herself checks and then pulling them out of the cancelled checks and reimbursing herself for fictitious expense reports. But, the very largest offense occurred when she credited the entire daily sales of the corporation back to her personal credit card at the end of each day. That’s right – the whole thing. Until I got there, no one was looking at the statement at the end of the month to see that the deposits that came in were five and ten dollars a day on two or three thousand dollars worth of sales. To thicken the plot, when we filed the police report, we found that she had a criminal record and had served time for embezzlement and assault. She was the poster child for why a background check is crucial and even stronger evidence that if you are not watching, they know it.
Volumes can be and have been written on the specifics of every little detailed control that a business owner should put in place. More importantly though and the key to any system is watching the information, maintaining the controls consistently and making that control part of your company’s culture. Don’t just hire, trust and hope for the best. Internal control isn’t personal. It’s critical to your company’s success.