Employee theft has become a problem for businesses of all sizes. It essentially affects businesses in the same ways no matter the size of the company. The most obvious of these effects is the loss of profits. Some of the other not so obvious effects are; loss of customer respect, loss of public trust, lower employee morale, cost of investigations, and the loss of good employees. But when you really look at all of the effects thefts have on a business it still all affects the company’s bottom line and profit. If a business’s theft problem becomes too large then the company will fail and this will cause a repel effect throughout the community.
Let’s say that XYZ Company opens a new location in a mid-size town. The new company starts to advertise with local newspapers and magazines. As XYZ grows they hire five new employees and open accounts with three local companies that provide supplies needed in XYZ’s product production. As a result of the new contracts, three new employees are hired by the local companies to ensure XYZ’s contracts are fulfilled. All of the new employees now have a check coming each week and as a result five of the eight open new charge accounts with local retailers. This example could go on and on, but I think you can see my point.
Now let’s say that XYZ Company failed to conduct proper screening of the five new employees they hired. Let’s also say that because they have grown so fast they have not had time to really look at putting internal controls in place. One of the employees they hired has started taking on more and more of the day-to-day accounting responsibilities of the company. In an effort to minimize cost, and because it seems like the easiest way, this one employee is given the duties of accounts payable, receivable, and keeping the companies checkbook balanced and reconciled. In other words, there is no separation of duties and responsibilities at the new XYZ Company. As a result, this good hard working employee starts to write himself or herself an extra check or two using a fake vendor account they created. After a year or so the employee has now set up three fake vendors and two ghost employees. Over the past year, the employee has embezzled $180,000.00.
It becomes apparent to the owners that the company is losing money but it is not clear where the loss is coming from. As they look back over the past year they see that they have hired twenty-five new employees and the two owners have backed out of the day-to-day operations of the business and had begun to enjoy the fruits of their earlier hard work and personal investments. As they ponder the problem each owner begins to blame themselves for becoming lazy and not remaining involved in the work. They both vow to return to the work floor and to go back to working at least sixty hours each week. After six months the owners are working harder than ever and spending every waking hour at the plant. As a result, they have picked up two new clients and feel that the business must be doing better and their financial position has to be improving. However, it quickly becomes apparent that they are still not working hard enough and they are forced to lay off five good employees. As time goes by they are again forced to lay off five employees and lose three customers who become worried when the news of the layoffs is released. As a result of the loss of customers, they fall behind on three accounts and are unable to meet their financial obligations. The owners now have reinvested everything they have in an effort to keep the company operating. More layoffs are followed by more loss of business and bad credit and the company is now down to just five long-term employees. Two other companies in town have been forced to also layoff employees when XYZ Company closed their accounts and failed to pay outstanding account balances.
Looking at the above scenario you can imagine all of the personal suffering and finical problems experienced by not just the owners, but the employees who also put a lot of hard work into making XYZ Company a success and a great place to work. Although this example may seem simple and over-exaggerated it never the less is similar to what happens with countless businesses every year. It has been reported that somewhere between sixty and one hundred and twenty billion dollars are lost each year to employee theft and fraud. The U.S. Chamber of Commerce has reported that one-third of all business failures can be attributed to employee theft.
Now suppose that the owners had read this article and recognized the importance of protecting the business from fraud and embezzlement committed by its employees. It is up to you, business owners and managers, to prevent this trickle-down effect employee theft has on the community. You also owe it to yourself, your family, and your employees not to allow your business to fail from something so easy to prevent. By practicing good hiring techniques, implementing proper internal controls, and taking a proactive approach you can protect your business from internal theft.