Tips on how to prevent internal theft.

Every couple of months, I hear a horror story from a contractor who was ripped off by one of his employees. These are sad, sorry tales.

Tales of lies, misplaced trust and broken hearts. How does it happen? And how can you keep it from happening at your small shop? Good questions. Let's take a look.

Here are a few popular ways to rip off the boss:

  • Moonlighting.

  • Pocketing cash tickets.

  • Fudging on time cards.

  • Charging personal items to your credit card.

  • Processing phony payables - "Pay to the order of Ms. Employee."

  • Taking office supplies or inventory for personal use.

  • Depositing sales revenues into own account.

  • Fudging on payroll.

Certainly I could make a longer list, but that would be too depressing. The worst rip off method I've heard of? A friend of mine discovered that his bookkeeper was depositing the payroll tax deposit into her personal account. She stole over $25,000 before she was found out. But even worse, my friend was liable for the missed payroll taxes - and the late penalties.

The Dreaded "E" Word

Embezzlement is a nasty subject; it makes you feel dirty just talking about it. In a small shop, it hurts even more than in a large company. A small shop is like family. It may even be family!

When you start out in business, you do everything yourself: run for parts, answer the phone, sweep the shop, etc. All that is in addition to handling the service calls. As you develop your business, it makes sense to hire and train competent people who can do some of the tasks you've been doing yourself.

What a relief it is to hire Beatrice Bookkeeper! Maybe she has a business degree and lots of experience. Perhaps she is a lot better with the "ten-key" machine than you are. You are delighted to turn the accounting duties over to her so that you can devote your time to other things.

Each day Beatrice takes on more and more responsibility. Life gets easier! She answers the phone and makes the deposits. You forget all about the financial side of the business, and pat yourself on the back for your delegation skills.

Then, the bomb drops. While leafing through the mail, you notice the quarterly payroll report from your payroll service. An entry catches your eye, but you have to read it three times before it sinks in. Beatrice's check reflects wages for a 40-hour workweek, but she only works 20 hours a week! Beatrice has been padding the payroll. In a panic, you race to the file cabinet and discover that there are no quarterly reports in the file. They should be there! Your stomach knots up, you start to sweat and, flabbergasted, you wonder, "Can this be true?"

Getting Caught

Sooner or later, every embezzler is exposed. Usually, through some out-of-the-ordinary activity, you discover something suspicious. One fellow told me he noticed a service-call-only invoice for a good, regular customer. He called the customer to make sure that there wasn't a problem. The customer assured him that the service tech had done a terrific job replacing his faucet. However, the customer did find it odd that the technician offered 10 percent off if he paid in cash.

Another contractor uncovered an embezzling problem when his credit card was declined for being overdrawn. Embarrassed and confused, the contractor raced back to the office to check the statements, only to discover that he was over his limit with charges that he didn't make. Still another contractor caught his customer service rep selling service calls to another plumbing company.

Why does an employee steal?

  • He feels you owe it to him: Joe Tech is basically a good guy, not a convicted felon. In order to justify stealing, though, he will rationalize his behavior. "I've been working past 6 p.m. every night for a week. I'll just keep the cash on this call. I deserve it!"

  • He means to pay it back: Bob in accounting is strapped for cash right now. As soon as he gets his insurance settlement, inherits his father's money or wins the lottery he will pay back every penny he took from you.

  • You aren't paying attention: Do you delegate all financial and accounting responsibilities? Be careful. For some folks, that is just too tempting. An employee who might not rip you off under your scrutiny may take advantage of your inattention. If you leave your keys in a parked car on a busy street, the police call that "enticing." Certainly it is wrong for anyone to take your car, but you would be considered foolish for leaving yourself vulnerable to theft.

  • Your employee has a substance abuse problem: Drugs and alcohol can turn a good person into a liar and a cheat. Alcohol and drug addictions are community problems, not personal problems. The people around the addict are always affected in some way.

Now, I am not suggesting that you never delegate responsibility, nor would I want you to become paranoid about everyone in your company. Most folks are hardworking and decent; they show up for work every day ready and willing to do a great job. But every now and then you'll hire a bad apple, or you'll employ a fairly reliable person faced with difficult circumstances. They'll cross the line - and rip you off.

How can you keep it from happening?

  • Maintain the highest personal integrity: Do you tell "little white lies?" Do you tell your receptionist to inform the customer on the phone that you are "out of the office" when you are most certainly not? Have you ever tried to get credit for damaged inventory from your supplier, when it was actually broken in your shop? Your personal integrity, as demonstrated by your actions, establishes your company's culture. Is your company's culture upfront and honest? Or is it "take what you can get?"

  • Be fair: Know this: you lose every argument you ever have with an employee about wages. Why? He'll get what he wants in the long run. The best bet is a pay structure based on performance. Establish a clear and equitable compensation plan that rewards productivity and adherence to behavioral standards. Fudging hours is the most common form of stealing by employees.

  • Make sure everyone takes a vacation: No one is so important that the earth would stop turning if he didn't show up for work. Insist that everyone at your company take a vacation now and then. It is a healthy and sensible thing to do. Also, an embezzler is most effective if no one else ever sits in his seat and does his job. Share his chair once in a while.

  • Open the mail: Yeah, I know. Bill Gates probably doesn't open all his mail. When you get as big as Microsoft, you can have someone else open the company mail. To get that big, however, you would have to develop a series of overlapping responsibilities to help protect your company from internal theft. A small shop has fewer checks and balances, though. Many forms of embezzling will show up in the mail via credit card statements, bank statements or letters from vendors alerting you to a problem.

  • Reconcile the bank statement yourself: It isn't that hard if you have a computerized accounting program. The bank statement reports all the cash that went in and out of your bank account. This is a critical document! If you can't bear the thought of doing the bank account reconciliation, at least thumb through the checks in full view of the person who will reconcile the account.

  • Read your financials: There are so many reasons for you to get comfortable with your financial statements and read them on a regular basis! It's your money. As the owner, it's your job to keep track of the business. Your employees will know that you are paying attention.

  • Open the books: What if everyone at your company knows where the money is? Do you think one dishonest person would risk trying to pull the wool over everyone else's eyes? I am a big fan of open book management. The more I learn about it, the more I like it.

  • Operate your company with standard procedures: Work with your team to develop a functional operations manual that covers every aspect of your business. Refer to it daily. Use it to train new employees. Change it when necessary to streamline systems and facilitate sales. Have a checklist for everything and impose accountability on everyone, including you.

  • Maintain a drug-free company: Solicit help from a professional drug-testing company and your insurance provider. Follow through! Establish a drug-free environment at your company, not just a paper policy. These guidelines will help you discover an embezzling problem, but even better, they will prevent embezzling. You will feel more comfortable, less vulnerable and you will protect the honest people who work for you.

Once upon a time, when I was a restaurant manager, I uncovered a scam involving three food servers and one of the cooks. They would sell dinners and pocket the cash.

The restaurant had procedures to prevent theft of that kind, but two things combined to allow the scam to go undiscovered for months. First, the procedures weren't being enforced. Second, several people were working together to cover one another's tracks.

One of the servers became overconfident and casual about the theft. She developed a kind of "everyone's doing it" mindset and stopped hiding her crimes.

When I finally figured it out, it took the wind out of me like a punch in the stomach. I trusted her! I bent over backwards to do right by her, and she ripped me off.

When I discovered others were involved, my heart broke. How could they?

It's a terrible, violating feeling to be ripped-off. These tips may keep it from happening to you. What to do if you have been ripped off? Or suspect it? Tune in next month!