Employee theft is a problem that could impact any company. Bookkeeping is essential to mitigate the risk.
Most employees are honest and loyal to their employer. Unfortunately, a small percentage of employees embezzle money. While it is unlikely that your employees are stealing, you should still setup internal controls as a precaution. Follow the tips outlined below and consult with your bookkeeper and CPA to develop the necessary safeguards.
A 2000 study from University of Cincinnati professors Bonnie Fisher and Johanna W Looye estimates that approximately 16% of businesses are victims of employee theft. While the report shows that the prevalence of employee theft isn’t very high, businesses shouldn’t be complacent. The rare occurrences of employee theft can create serious financial problems for businesses.
Every business needs to setup internal controls to identify and prevent employee theft. The Boys & Girls Clubs of Sonoma Valley established these controls, which allowed them to discover that one of their employees was embezzling from them. The club’s procedures allowed them to identify the fraud and take action before the losses crippled the organization. Those controls were implemented after another embezzlement case in 1998, when an employee stole nearly $90,000.
Other businesses in Petaluma should learn from this case. They should adapt similar controls, because employee theft does occur in Sonoma County. Fortunately, the steps outlined below have been proven to be highly effective deterrents.
You should consult with your bookkeeper and accountant to setup the internal controls needed to identify and prevent employee theft. Here are some of the ways that they can help.
Conduct Both Planned and Unannounced Audits
Conducting audits is the best way to identify discrepancies in cash and inventory. Announcing planned audits appears to be one of the most effective ways to prevent fraud. A study from Richard Daft from Vanderbilt University found that employees are less likely to commit theft if they are aware of bookkeeping audits and other internal controls.
However, it is also important to have your bookkeeper conduct unannounced audits as well. Employees may be less likely to try to hide theft if they aren’t expecting an audit.
Use External Auditors and Bookkeeping Agencies
A recent study from the National Federation of Independent Business (NFIB) found that independent agencies are 15 times less likely to steal from a business than employees. They also don’t have an incentive to cover for fellow employees that may be engaging in fraud. The NFIB recommends hiring independent bookkeepers and accountants to conduct audits.
Owners Should Be Highly Involved in Financial Process
Mike Rhodes, a partner in a major New York accounting firm, recently emphasized the importance of small business owners being involved in the accounting process. Rhodes said that that many business owners prefer to focus on more exciting aspects of the business, such as attracting new customers. However, Rhodes experiences show that owners that review financial ledgers are much more likely to identify fraud before it becomes a serious concern.
Compare Inventory Levels to Bookkeeping Records
Maintaining accurate financial records is essential to prevent employee shrinkage. However, sound bookkeeping alone isn’t enough to identify potential fraud. You also need to physically count inventory to see if it matches the figures listed in your balance sheet.
If inventory levels are noticeably lower than the value listed on the books, then the goods are either being stolen or waste isn’t being properly reported. Rhodes recommends conducting these audits at least once a year.
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