February 24, 2020
COMPANY THEFT AND WHO COMMITS IT
Company Theft Scenario
Company theft is undetectable in most small businesses. This scenario is commonly seen by our staff when company theft and fraud occur.
Sophie arrived at work a little late that morning. It was 7 am. After parking her car, she hurried to unlock the door quickly, turn on the lights, and get the coffee pots started for the first crew that arrives by 7:30. Her hands were trembling as she began to fill the coffee grounds. She stopped for a moment to collect herself. She looked up and caught her reflection in the window that faintly revealed the dark circles and puffy bags under her eyes.
She finished prepping the coffee. As the coffee pots brewed, she settled into her chair in the front office and pulled her keys from her purse to unlock her desk drawers. She noticed the ragged edges of the envelope sticking out of her purse before replacing her keys. With hands shaking again, she shoved her keys back into her bag and pushed the envelope out of sight. Her attention turned to the signature stamp in the opened and unlocked drawer, then to the book of blank checks next to it.
The front door buzzer chirped as it opened to the noise of trudging steps. The first of the crew began their arrival into the shop. The staff greeted Sophie with a hearty, “Good Morning!” She responded with a cheerful “Good Morning!” and quietly closes the drawer with the checks and signature stamp.
This scenario is all too common in many small businesses. These are the businesses you see as you drive through cities and towns; they offer plumbing services, excavation, landscaping, home improvements, et cetera. Each company has employees that are in very trusted positions for five years or more and have access to company funds with little oversight. After reading the above story, the situation presented before Sophie is evident – she is wrestling with her conscience, and there is a high likelihood that her long-held sense of right and wrong will be compromised.
Who will likely defraud your company?
Employees in these types of roles are usually of very high morals and integrity. There would likely be countless friends and family that could vouch for Sophie’s character. However, no one is immune to detrimental life events; there may be problems due to personal addictions, divorce, high personal debt, medical issues, you name it. The list is endless with possibilities. If an individual is in a trusted role and has the opportunity, there are very few individuals that would be able to resist the pull of just a little bit to help get to the next paycheck. Fraudsters will rationalize company theft by thinking, “It’s just a small amount. It’s just a small loan. I will pay it off right away. No one will ever find out; it is so small.”
It is extremely rare for the theft to occur “just once” and be repaid. What frequently happens is the “just a little bit” happens again, and again. More significant amounts begin to be drawn out, and efforts then are made to try and hide the actions. Fraudulent transactions are buried in other expenses in the ledger, and even worse, the original bank statements are altered. Frequently, the amounts that are taken begin to supplement the employee’s income. When that happens, the employee’s lifestyle adapts to the extra income as they become emboldened to take more and more and more.
It is very easy to find fraud stories in the news where employees in these scenarios have taken out substantial amounts over several years and have excessive lifestyle purchases to show for it. However, it is difficult finding stories of the employees that commit company theft of lesser amounts. Despite lack of prosecution, these acts did cause substantial losses to small businesses that can ill afford it.
How can you minimize fraud?
Internal controls, policies, and procedures in a business should be an essential focus of all business owners. Ensuring a sound internal control environment will include accountability to the individuals involved, and there is sunlight on all aspects of it. Whenever too much control is granted to one individual, no matter how honest or trustworthy they seem to be, the risk of theft is heightened by the mere fact that opportunity is there. Opportunity is never completely removed. There are always bad actors intent on thievery. However, lessening the availability of any opportunity will ensure that good, honest people think twice before stepping across that line of fraud.
A forensic accountant conducts two types of actions for these kinds of businesses. The first action, which is proactive, is to assess an environment, identify the faults, and recommend corrective actions. The second action, reactive, is after the fraud has been committed – after the theft of funds, after broken relationships, after fractured families, and before the litigation.
To all business owners, how is your control environment? Do you have internal controls in force? Does Sophie work for you? Contact us today to help your company to create a control environment.
Peter is a partner at Wilke & Associates and has his CPA and CFE certifications. He concentrates on auditing, forensic and fraud accounting, income tax planning, business planning, and consulting services, including software selection, entity selection, and buying and selling businesses.