The business community is suffering an ever-increasing number of internal thefts. Some businesses actually are forced to close as a result of internal theft—the most commonly described are shrinkage, embezzlement and fraud.

Shrinkage or Theft: Taking, consuming, removing or converting someone else’s property for personal use. This can be as simple as the unauthorized consumption of food in a restaurant to the removal of products, cash or equipment from businesses. It also includes intellectual properties such as patented processes, copyright-protected computer programs or private client information.

Embezzlement: Taking or using money or property without the proper right or authority to do so, or intentionally making errors in bookkeeping practices to allocate funds for one’s own use.

Fraud: Deceit used for personal financial gain.

Employee Theft

Most employees would never take cash from their employer's or another establishment's cash register or shoplift. An asset of your business, however, might be seen as a job benefit or something so insignificant that it will never be missed. The sad fact is that dishonest employees account for two-thirds of theft businesses experience.

Employee theft ranges from pilfering pens and pencils to grand larceny of equipment or finished goods. Methods vary, too. Items are slipped into pockets, pocketbooks or briefcases with little or no forethought. Or someone might plan ahead, hide when the business closes, then carry out the theft in solitude. In any case, the action constitutes theft. Stealing is stealing. It is a cost of doing business that steals from the available and potential funds that cover other expenses, including the wages and salaries of all employees as well as the profit of the company.

When you suspect theft, contact the police or a professional security consultant for help. Don’t try to solve the crime on your own. You could hinder the investigation. Also, you could risk exposing your company, your coworkers and yourself to liability or serious danger. Cooperate with the authorities, and keep your bonding or insurance company informed. Remember, you will need absolute proof of the theft and the amount stolen to help you recover your losses. If employee theft is proven, always prosecute. Don’t settle for restitution and an apology, because it invites theft to continue.

New Employee Selection: Screen and select new employees carefully by using reference checks, credit checks, psychological tests, polygraph tests (where allowed by law) and personal character examinations.

New Employee Monitoring: Detect dishonest new employees by watching them closely and checking daily receipts.

Performance Standards: Adopt a standard of excellence in conduct and performance. Encourage your employees to be the best and take pride in their jobs. People who feel pride in their work accept responsibility for their performance.

Management Integrity: Employees who see their managers adhering to high ethical standards are likely to follow their example.

Employee Treatment: Treat employees fairly and with dignity. Set reasonable work rules and apply guidelines consistently.

Return and Refund Duties: Assign a supervisor to inspect and verify the receipt of returned merchandise either as a means of double-checking refunds or before authorizing refunds made by the salesperson or cashier.

Shipping/Receiving and Recording Duties: Require the completion of receiving reports as soon as items are received, then conduct a second check of materials to verify quantities logged in by employees who handle receiving. Make sure that supervised shipping personnel, not unsupervised drivers, help load trucks.

Trash Disposal: Supervise trash pickups, and occasionally check trash collection sites and trucks. Collusion between dishonest employees and haulers is not uncommon. Also, don’t accumulate trash or have it picked up near where valuable materials are stored.

Physical Security: Use key controls, time locks, changing locks, alarms and security guards to discourage dishonest employees. For maximum protection, limit the number of active doors. Motion detectors, electronic eyes and central station alarms can be effective in preventing "break outs." This type of theft occurs when someone, often an employee, conceals himself in your establishment until after hours, removes property, then closes the door behind him, leaving no evidence of intrusion.

Internal Controls: With the advent of bar-coded inventory controls and programmable cash registers, it is possible to maintain a perpetual inventory. Spot-check inventory records at random to detect and discourage shortages. Conduct unannounced inspections of work areas, warehouses, storerooms and loading docks at frequent and random intervals. Also, a method some owners and managers find effective is to commit deliberate errors to gauge the effectiveness of internal controls; they then monitor the error, discover when and where it is caught, and evaluate how employees handle it.

Embezzlement

Symptoms of one disease often resemble another. Likewise in business the symptoms or danger signs of an embezzlement can mislead you. Some clues may indicate that either an embezzler is at work in your company or certain aspects of the business need more of your attention:

• Increase in overall sales returns could be caused by defective merchandise—or it might represent a concealment of accounts receivable payments.
• Unusual bad debt write-offs can be due to a number of business reasons—or they could be covering up a fraudulent scheme.
• A decline or unusually small increase in sales might mean that business has not been good—or it could mean that some sales are not being recorded.
• Inventory shortages can be caused by error or mismanagement—or they could indicate fictitious purchases, unrecorded sales, or employee pilferage.
• Profit declines and/or increases in expenses can be entirely legitimate—or they could be a sign that assets are being siphoned off illegitimately.
• Slow collections can be caused by business conditions—or they can be a device to mask an embezzlement.

Internal Controls Procedures

• Careful supervision and segregation of all banking duties.
• Shift responsibilities if possible and avoid giving one employee too much authority. This also makes collusion between employees less likely.
• Have written policies on ethical behavior signed by each employee.
• Try not to allow the same person to handle money both coming in and going out of your business.
• Review canceled checks and payroll checks.
• Review employee calls on your phone bill for unusual activity.
• Question excessive number of voids, credits, returns or damage claims.
• Be aware of an employee who has a sudden change in financial status or starts buying expensive gifts, cars and clothing.
• Record all cash and checks at the time received. However, an accounts receivable clerk should not also open mail containing incoming payments.
• Dual signature of checks should be required unless signed by the owner.
• Examine all invoices or supporting data before signing checks. Be sure the merchandise was received, the price seems reasonable and to cancel the invoice to avoid double payment.
• Don’t pre-sign checks and inspect all pre-numbered check books to be sure checks from the back of the book have not been removed.
• If cash in high amounts is kept on premises, keep it in a locked safe with limited access.
• Maintain exacting inventory records with emphasis on auditing quarterly if possible.

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