There's nothing more disheartening than learning that an employee - someone you trust and have been PAYING! -- has stolen from you or the business you've worked so hard to build. Unfortunately, history has shown that a struggling economy such as the one we are currently experiencing witnesses an increase in employee theft.

Employee theft is a serious threat to the success of small and middle size businesses. The Association of Certified Fraud Examiners (ACFE) in its 2008 Report to the Nation estimates that seven percent of U.S. revenue is lost to occupational fraud. The U.S. Chamber of Commerce recently conducted a survey that reported that 1/3 of bankruptcies are caused by employee theft. Why are these businesses letting this happen? Because most small and middle market business owners do not see a need to be proactive in addressing this potential problem; they tell themselves that THEIR employees just wouldn't do that. To view the full article, click here.

WHY do employees do it?
There are usually two major factors that can cause an employee who has otherwise been an honest and trusted employee to suddenly become involved in an embezzlement or theft. The first is substance abuse, either by the employee or one of the employee's loved ones; the second is pressure created by an economic downturn.

WHO in your company could be stealing?
Experience has shown that when a significant embezzlement or theft is discovered, it is usually a situation where the employee is a trusted person who has been with the company for an extended period of time. The employee has an exemplary work record, is dedicated, and is considered to be a "company person." In fact, if the employee did not have the implicit trust of the employer, the embezzlement or theft might never occur. The breakdown in internal control creates a situation where the dishonest employee can manipulate the system.

HOW does the employee get away with it?
Typically, the employer is extremely busy and does not have time to get involved in the accounting department. Also, smaller companies may not have the staffing and/or financial expertise in place to ensure a strong system of internal control procedures. When you combine the previous factors with the employer's feeling of total trust in the employee and an employee's struggling economic situation, OPPORTUNITY for theft presents itself and the situation can prove to be very dangerous.

WHAT can you do to prevent employee theft?
Many businesspeople are not aware that the scope of a typical accounting engagement does not include specific services relating to the disclosure of employee fraud. It is of critical importance that every employer focus on his/her exposure to potential employee fraud. It is unfortunate that few businesspeople consider this potential for loss in their own operations. It is not until after such a theft is discovered that most employers become aware or sensitive to their own exposure. It is imperative that every businessperson understand why employees commit fraud and what can be done to prevent employee embezzlement and theft.

We encourage all of our clients and friends with businesses to have the necessary internal controls in place that will create an environment that not only inhibits internal theft and fraud, but also provides the means to prevent and detect it. That means looking at hiring procedures, separation of duties, "accounts payable and billable" processes, reimbursement and spending methods, access and authorization controls, and other financial controls to ensure that your internal controls are discouraging theft in your workplace.

Hopefully, your internal controls are designed - or will be designed - to ensure effective and efficient operations, legal and regulatory compliance, a safeguarding of assets, and accurate financial reporting. Our firm can assist you with your internal control design, implementation and review. We can evaluate your company's operations to determine if appropriate controls are in place to safeguard the integrity of your financial records, reveal any discrepancies, and help protect you and your business from employee theft.

An effectively designed system of operations and controls will not only help you run a smooth business, but will also send a message to your employees that anti-theft in the workplace is a top priority which WILL be discovered if it happens and which will NOT be tolerated. Please be proactive and don't ignore this risk!

Follow these links for just a few of the very recent examples of companies shocked when a seemingly "trustworthy" employee was caught embezzling, in one instance millions of dollars to fuel her shoe fetish!

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2009/03/07/state/n115819S02.DTL
((follow-up story: http://www.npr.org/templates/story/story.php?storyId=101586112),

http://www.pe.com/localnews/inland/stories/PE_News_Local_S_colton25.4636948.html

http://www.mercurynews.com/ci_11893176?source=most_emailed

http://www.bakersfieldnow.com/news/39897917.html.

Please call us if you have any questions or if you'd like additional information. We will be happy to assist you.

If you have questions or if you’d like additional information, please don’t hesitate to contact us at 770-261-5447 or tcloud@bnkj.com.

Babush, Neiman, Kornman & Johnson LLP