Corporate Legal Advisors SM


Statistics, Anecdotes and Examples (Statistics are always subject to doubt and debate.)

  1. Your employee/manager/(worse) partner has been stealing. She is caught. She is gone. So is the money. Statistics on recovering the loss are grim to awful. I have seen 20 percent numbers in national publications. My professional experience puts the number lower and not because of a lack of ability or effort. The nature of the crime and criminal results in consumption. The average employee thief is not building a retirement nest egg. He is feeding a habit/addiction (drugs, gambling, consumerism). What are you going to do with a room-sized plasma TV or three jet skis?

  2. Fraud losses are bottom line losses. If your profit margin is 10 percent, you need an additional $100,000 in sales to cover a $10,000 loss. Back to the statistics, I have seen numbers like six percent of revenues to 20 percent of profits lost, nationwide, to some type of workplace fraud. This numbers can be skewed by how fraud is defined. For example, personal activities via the internet or telephone by employees (supposedly averaging one hour per day) will vary the numbers substantially depending on whether these activities are considered workplace fraud.

  3. The average fraud scheme lasts 16 months before it is detected.

  4. Up to 75 percent of employers uncovered fraud in their organizations during 2018. Again, how was fraud defined? Still an alarming number at half as much.

  5. Collusion between employees and outside vendors is the growing trend. A vendor offering kickbacks if an employee buys its products, for example. (And, I am not talking about frequent flier miles).
The Nature of Workplace Fraud

  1. Years ago, I joined a religious congregation/church in Minneapolis. Within six months it was discovered that the long employed and much beloved bookkeeper had stolen well over $250,000 (the real number was never determined) over the course of several years. Essentially used the "one for me, one for you" approach to accounting. Virtually none of the stolen money was left by the time the bookkeeper was caught. This incident is very typical. Small businesses (and, a neighborhood church, on the material side of its operation, fits the category) are hit hardest by workplace fraud. The average scheme costs a business $127,500. Target Corporation and the four person shop do not suffer equally from this average loss.

  2. The most likely perpetrator is your most trusted employee. Losses caused by perpetrators older than age 60 are 27 times higher than losses caused by employees age 25 and younger. Frauds committed by manager-types result in median losses of $250,000 - more than four times the average loss caused by non-management employees.
Red Flags

  1. Profits down, sales up.
  2. An employee who is always complaining and constantly breaking the rules.
  3. An employee who suddenly becomes a big spender.
  4. Missing files or documents.
  5. Inaccurate records or a lack of spending and budget controls.
  6. Unexpected increases in transactions with certain vendors.
  7. Employees who are reluctant to take vacations.
  8. A failure to produce timely reports.>
  9. A lack of adequate safeguarding of key documents.
  10. A lack of documentation of business transactions.
  11. Poor security on physical assets and a failure to conduct regular inventories.
Who Do You Trust?

  1. Every fraud involves an element of trust. In small businesses, the owner/manager is more likely to trust his employees. Your defenses are, therefore, down.
  2. Trust should be a relatively applied concept. For example, if one person is in charge of bookkeeping, more vigilance is required
  3. Assume that 80 percent of the employee population will commit fraud if three critical factors converge - opportunity, pressure and rationalization. Further assume that the other 20 percent of employees are evenly divided between saints and sinners - those who would never, and those who will without a doubt. Are you good enough to innately pick out the one in ten who would never and just hire those saints? Of course not. Therefore, be proactive..

Employee fraud is a reality. Your business will not fail if pens and pencils and other office supplies disappear faster about the time the school year begins. It can fail if one employee is issuing checks to a phantom vendor and then using the proceeds at the casino.

Focus on the critical factors - opportunity, pressure and rationalization - with respect to each employee/business partner. Use a "red flags" list approach to reviewing each employee's situation. Use background checks where appropriate. If bookkeeping/accounting or other key activities are solely the domain of one employee, look to outside review by you or others to help keep that sole employee honest. Remember my church bookkeeper? If anyone was tracking church membership to weekly donations, the fraud could never have occurred longer than a month or so. The ecumenical equivalent of tracking sales and profits.

Who can you trust? In business, no one absolutely.