Right Under Your Nose… Shop Embezzlement

Flowers and Profits®

Trust. We all want to believe in the honesty, reliability and integrity of our employees. But your management methods could foster dishonesty, and it only takes one morally lax employee to bring your business down. What can you do to make sure an employee you've put in a position of trust will not embezzle from you?

It starts so innocently. You hire someone who is happy to do some of the jobs you dread - balancing the checkbook, totaling the sales at the end of the day, sending out invoices, etc. Little by little, you pile on the duties, grateful to have an employee who does them without complaint and without fail.

Unfortunately, you've set yourself up for disaster.

Take the case of the flower shop owner who gradually turned over bookkeeping, shipping and receiving, and overall shop managing to a workaholic employee. After four years, the shop owner didn't know what she'd do without the valued employee.

Now she knows. She'd be about $45,000 richer today. It turns out that the employee was pocketing anywhere from 10 to 50 percent of every cash sale made at the shop. She'd also been doctoring the books - in her favor - for a couple of years.

Complacency Means Trouble

Maintaining a business that discourages embezzlement all begins with you. As a business owner, you have to keep track of your income and expenses, even if you find all the number crunching a bore. Handing all the fiscal responsibilities to someone else is a dangerous practice. At the very least, you should sign all checks, review and understand a detailed financial statement, and have your shop audited every six months by an outside party.

Better records also equal better evidence if embezzlement does occur. It's often difficult to determine just how much has been stolen, especially if the fraud has gone on for an extended period of time. Most embezzlers think they are smart enough to beat whatever system you have in place. The more checks and balances you build into it, the more likely you'll be able to expose any discrepancies.

Hire Smart

Trust begins with your hiring process. When you hire, follow-up on personal and business references listed on resumes. Evaluate work histories. If the applicant has had many jobs over a short period of time, try to determine the reason. Someone who moves from job to job is usually easily disenchanted or has been asked to leave by the employers.

Unfortunately, some people misrepresent their backgrounds, so it's up to you to do a thorough background check. The easiest way to verify educational records is by requesting from the applicant certified transcripts, and copies of diplomas and certificates indicating the completion of degree, technical, and trade programs.

Credit Reports offer another simple resource to check. Naturally, you should make sure the applicant has no criminal record or outstanding warrants. The quickest way to check criminal records and other such information is by using a service such as Equifax (888-909-7304) www.equifax.com, TransUnion (800-916-8800) www.TransUnion.com, or AccuFax (800-256-8898).

Look for stability in a potential employee. If the person has lived in the area and kept jobs for a year or longer, this demonstrates dependability.

After you've hired someone, test the person's integrity by dropping a five-dollar bill on the floor near the cash register and a place off-limits to customers, then go to lunch, leaving that employee alone to run the shop. If the bill disappears and no mention is made of it, it could be that your new employee is an opportunist and less than honest.

Separate Employee Duties

Before you ever place an employee in a position of trust, you must first safeguard that position from possible fraudulent activity. Not allowing one employee to handle a transaction from beginning to end eliminates opportunities for that person to manipulate funds.

If an employee is responsible for entries in accounts receivable, don't allow that person to receive cash and checks. Likewise, someone responsible for the billing shouldn't also handle customer complaints.

Allowing employees to keep records of your business transactions in addition to your own books is foolhardy. You're only making it easier for an embezzler to cover his tracks.

No matter how long a person works for you, don't become complacent. Be alert to any lifestyle changes. For instance, if an employee buys a new car and begins to wear nicer jewelry, you should pay closer attention. The employee could have a second job or might have inherited money from a relative, but these strokes of luck generally aren't kept secret. "Living large" could be the first tip-off that an employee is dipping into the till.

Be wary of someone who doesn't take vacations or insists on staying in the shop on lunch breaks. An eager employee might be just that, or you might have a thief on your hands. Being alone in the shop affords a thief a chance to steal. An employee who offers to take more and more responsibility without ever asking for a raise should raise your hackles. People expect to be compensated for their work - one way or another.

An Ounce of Prevention

To lessen the chances of employee theft, exercise these precautions:

• Control the mail. Have it delivered to a Post Office Box and collect it yourself. This way you know exactly what's coming in.
• Record receipts when the mail is opened. If you must have someone else do it, randomly perform spot checks and audits.
• Inspect invoices for quantities and price before you pay them.
• Prepare deposits yourself or compare deposits with receipts. Require duplicate deposit slips from your bank.
• Examine checks for cancellation and endorsements.
• Require that checks written for more than a certain amount be signed by you and a designated employee.
• Secure and inspect pre-numbered forms and business checks to verify none have been removed from the back.

Warning Signs

Even with the best accounting systems, if you don't know the warning signs, you could lose thousands of dollars before you realize an employee has been stealing. Some of the following activities might seem innocuous, but they can be the first clues to deeper trouble.

• Inventory. A shortage may be caused by outside theft, mismanagement, incompetence, or simple bookkeeping errors. Shortages can also be a sign of false purchases, employee theft, or sales that have not been recorded.
  
• Closely monitor not only what is coming in on shipments, but also what is going out. Restrict access to your receiving area. Keep stockrooms neat and orderly. An unorganized work area is harder to check for unusual discrepancies.
  
• Sales and Profits. If sales decline, you know it. But do you always know the reasons for the lagging profits? For instance, street construction might have routed some customers elsewhere, but question whether all sales are being recorded. Perhaps cash is being taken or checks in the deposits are being handled incorrectly.
  
• Spot check registers. Begin each day with the same amount of cash in the till and do random audits against sales. Verify deposits, and if you have someone else preparing them, randomly do them yourself. Don't allow yourself to slip into predictable patterns.
  
• Miscellaneous Mishaps. Other warning signs include mail going out late, sloppy bookkeeping methods, increased customer complaints about inaccuracies or mix-ups, an increase in the amount of returned merchandise, unauthorized voids, an unusual number of no-sales rung up on the cash register, falsely recorded overtime, missing supplies, and unauthorized long distance charges. A safeguard is to personally approve discounts, credits, and returns, and to look over all itemized billing.

If You Suspect

If you find something amiss and believe you have a thief on your team, don't confront the suspected employee. After all, there may be a valid explanation for the suspected activity.

Your best plan of action is to have an audit conducted immediately by an independent accountant. You should also contact your attorney in case something turns up in the audit. Follow all legal advice and take the necessary steps to protect you and your shop from charges of false arrest.

Chances are you won't recover your losses, but you will be putting a thief out of business.

Above all, do whatever you can to discourage embezzlement. When employees know you're watching, they won't be as tempted to steal from you. Thieves look for employers who are too trusting or too busy to keep a close eye on what's going on right under their noses.

Manage your own business sensibly and fairly, keeping in mind that no one cares as much about it as you.