Internal Controls to Protect Your Shop

Companies with fewer than 100 employees tend to be more vulnerable to internal thefts because they generally don’t have many internal controls, fraud fighters say.

Owners have to think about how they can be ripped off and then must design ways of doing business that protect them from their own employees. The procedures should be in writing.

“Let employees know that you take fraud seriously and have a clear policy in place, such as termination and prosecution. You have to set the tone and the example,” said Dan Ray of San Francisco, a certified public accountant and former FBI agent who directs Hemming Morse Inc.’s litigation services group.

An estimated three-quarters of all employee fraud goes undetected, some of it low profile, such as taking supplies, said Jim Helmkamp, research director for the National White Collar Crime Center.

Ray and other experts say a basic set of internal controls can get a company started on the right path:

* First, try to segregate duties and responsibilities, although this may be impossible in a mom-and-pop operation. “If someone who prepares billings also receives the money coming in the mail, there’s no checks and balances,” Ray said. “The money could come in, and the employee could pocket it without anyone knowing it was billed or paid.”

* Guard computer access and codes. “Embezzlement is a traditional crime, but computers have done for it what the microwave did for popcorn,” said Henry Pontell, a UC Irvine criminology professor who specializes in white-collar fraud. Clear out factory passwords and replace personal passwords regularly with less obvious ones.

* Rotate assignments, especially in financial and accounting matters. “It’s the best thing you can do, because the employee has got to be there to do the fraud,” said James B. Hunt, national director of Price Waterhouse’s investigative services. “Look especially for the employee who doesn’t take vacations.” A side benefit: Employees become cross-trained.

* Obtain fidelity bonding. “The typical corporate executive doesn’t understand the size of fraud today,” Hunt said. Insurance helps to limit the loss, though executives must understand what it covers and when to file claims.

* Know who you’re dealing with and know the schemes employees could use. If a supplier or customer doesn’t sound familiar, check him out. Phony vendors and ghosts on the payroll are as common as frauds in billing, shipping and advancing fees.

* Follow up on anything that seems odd or out of place. The anonymous note about something being wrong, or a temporary variance in bank statements or inventory, could lead to the discovery of a major fraud.

* Look into recent signs of affluence among employees: the Porsche, the expensive vacations, the things other similarly paid employees don’t have or can’t do. “It’s amazing the number of employees flaunting their newfound wealth,” Hunt said.