“One of our most trusted employees stole $200,000 over the past two years.” This fraud had a significant impact on their bottom line and came as a shock to the owners of a SME with 85 employees and 3 offices across Canada. This employee, who had been with the company for 3 years, had committed this same act at her previous employer and was never prosecuted because the previous employer did not want the bad publicity. That failure to take action against fraud gave the dishonest employee an opportunity to continue her corrupt behaviour. How could this have happened? Unfortunately, it is a far too common occurrence. Internal theft and fraud is estimated to cost Canadian business $40 billion annually.
This article will explore common myths SMEs believe and some tips to assist them to mitigate their risk of internal theft or fraud occurring.
Many SME owners believe that due to their size, their closeness to their employees and their daily operations, they are not susceptible to internal theft or fraud because:
- Their employees would not commit fraud;
- The SME owners monitor operations very closely and would know if fraud is occurring;
- Internal controls would prevent fraud from occurring; and
- Damage from internal theft or fraud would not be significant and would not affect operations.
These sound good but they are myths. The reality is that SMEs are considered to be at a higher risk of internal theft or fraud because:
- SME owners develop a close personal relationship with many employees and place more trust in their employees, which is often misguided;
- Because of this trust, they do not monitor operations closely;
- Many SME owners do not expend resources to update and modernize internal controls to protect their assets; and
- In a recent study conducted by Ernst and Young, 47% of the companies surveyed had experienced significant fraud that had affected operations.
It is important to understand that no one knows your systems and weaknesses better than your employees. Locks, alarms and other physical security devices are ineffective when the thief has full open access to your company. Now this is not to say that every employee is a thief. Most are honest and very loyal to their employers. However, it does not take all your employees to commit a significant fraud to affect the financial stability of your company. According to the Association of Certified Fraud Examiners, 20% of bankruptcies in the US are a result of internal fraud. That is significant.
How do I protect myself from these dishonest employees? The simple answer is – Don’t Hire Thieves! But, thieves don’t walk around with “Thief” written on their foreheads. They use lies and deceit to hide behind a persona of honesty and respectability. But, effective background investigations will pierce that veil of respectability and will verify who is sitting across the table signing that employment contract. It is far more cost-effective to prevent employee misconduct, workplace violence or criminal activity than to later investigate and mitigate the damage to your employees, your clients, your bottom line but above all your reputation.
The majority of employees that are honest, loyal and dedicated do not like working with thieves. You may not be aware of missing assets, but many of your employees will know who is stealing and how they are doing it. The problem is communicating that to management. Most people do not like to be labelled “snitches” and will not willingly report fraud or other inappropriate conduct to management where their identity can be revealed to the office rumour mill. This leaves the SME at risk of potential civil litigation or of potential losses resulting from internal theft or fraud.
Some of these risks can be easily mitigated. None of this is rocket science but, to prevent internal theft or fraud from occurring within your SME, you must take action. Here are five simple steps that you can take to mitigate your risk of potential internal theft and fraud.
1. Lead by Example
Your “Tone at the Top” must demonstrate honesty and integrity in all your actions in dealing with employees, customers and suppliers. If you are seen to be dishonest in dealing with customers or pilfering corporate assets, you can be assured the employees will be following your example. Notwithstanding that you may own the company and all its assets; the employees will see this as a way to rationalize their own illegal conduct.
2. Pre-employment Screening
Develop a practical policy and perform background investigations on all new hires to the company and on a periodic basis as well. These enquiries may include investigations into:
- Resumes including education, previous employment verification and reference checks, to name a few;
- Where appropriate, criminal record and other enquiries relating to an applicant’s conduct or employment responsibilities; and
- Other enquiries as relate to the employee’s position and the function of the SME.
3. Whistleblower Line
Give your honest employees an avenue to report inappropriate conduct. A Whistleblower or Tip Line is an excellent and cost-effective means of providing that. However, experience has shown that if this line is filtered through any department within the organization, it will not be effective. Anonymity is absolutely essential for this program to be useful. In addition to anonymity, having experienced investigators receiving the calls has also proved to be invaluable as appropriate questioning will result in more information being provided. Although this is an anonymous line, most employees will give their name and contact number to an independent operator.
4. Awareness Program
Develop a fraud awareness program. Remember, no one knows your weaknesses better than your employees. Use them. To be effective, this program need not be elaborate or costly. It may simply be just getting together at a regular interval such as a “Lunch and Learn”, where discussions ensue around such issues as security, safety, internal controls and fraud. Incentives could be offered for ideas relating to improving controls or for suggesting other measures that may benefit the bottom line. Interaction with your employees in discussing theft and fraud brings a whole new perspective to them and they will take ownership to prevent theft and fraud from occurring within their company.
5. Review Internal Controls
Review internal controls on an annual basis to ensure they are appropriate and meet your needs. Technology has advanced exponentially. Internal controls must meet these new challenges. Are yours doing the job? Review them to find out and improve them as needed.
The risk of internal theft and fraud occurring within a SME is high. However, you need not bring in expensive outside consultants to develop a prevention program. Due diligence and these simple steps will go a long way to mitigate that risk.
For more details go to:
http://www.thegaap.net/calm_waters.html
