Protecting Your Company from Theft, Part II: Stopping Theft and Collusion

As I mentioned in my previous post, theft from break-ins and shoplifting is generally a fraction of the losses business owners incur compared to employee theft and collusion with dishonest customers. What steps can you take to minimize your exposure to this type of theft? Here are a few tips:

• Background checks. As mentioned in my post about pre-employment screening, the proliferation of the internet has made it inexcusable to not do a background check on all applicants prior to hiring them. Background checks have saved me from hiring embezzlers, burglars, child molesters, drug dealers, and numerous other criminals. Not hiring criminals is the first and most important step in preventing employee theft and collusion.
• Internal checks and balances. Do not let only one employee perform financial tasks such as balancing bank statements, issuing checks, transmitting payroll to an outside payroll processor, and other similar tasks. Always have at least one co-worker and one manager review all such work. It is much rarer for three employees to steal than just one.
• Vacations. All employees should be required to take at least one week's vacation. Not only does a vacation rejuvenate employees but employees who are stealing generally get discovered when on vacation and someone else is doing their job. Be very wary of an employee in a financial position who resists taking a vacation.
• Check signing. I sign almost all checks. Exceptions are petty cash checks written at each of our branches and when I am on vacation. Our petty cash accounts have a maximum balance of $5,000 to limit losses if a branch manager is dishonest. When I am out two other trusted long time employees can also sign checks. We also require two signatures on all checks for $100,000 or more.
• Bonding employees. We get fidelity bonds on all of our employees, even truck drivers. If an employee can't be bonded we don't hire the person. In the rare occasion when we have had employee theft our bonding company has reimbursed us. The premium for this policy is a small price to pay for peace of mind.
• Ship off of invoices, not "pick tickets." If you ship off of a pick ticket or packing slip a dishonest employee who is colluding with a customer can change the pick ticket after it comes back to the accounting office after a delivery or from the shipping department, before it is converted into an invoice. A dishonest employee can delete items from the pick ticket in return for a cash payment from a crooked customer. Most times your employees will balk at doing this with the excuse that they have to issue too many credits when drivers come back with some of the items that were refused upon delivery. Stand your ground and insist on shipping only off of invoices.
• Keep track of handwritten invoices. All businesses need to write handwritten invoices during a power outage unless they have a back-up generator. (A back-up generator is a good idea for this reason as well as many others. We have two.) Be sure your handwritten invoices are in a bound booklet and have carbon copies. Then check the book at least quarterly to ensure that ALL handwritten invoices were converted to computer invoices and mailed. Crooked employees have been known to destroy handwritten invoices in return for a kickback from "buddies."
• Fraudulent credit cards. Over the last few years I have gotten about five scam emails a week where a person poses as a contractor from a foreign country looking for materials he can't get in his country. They always say they will pay with a credit card. Many merchants don't know that even if you get an approval code the credit card issuer can "claw back" payments you have received if the card turns out to be fraudulent. When I get these emails I respond by saying we only do business with overseas customers who we don't know if they wire payment to our bank in advance. I never hear back.
• Receiving. A lot of employee theft happens in the receiving area. An employee can be in collusion with a supplier and sign for more material than actually was received in return for a kickback from a dishonest supplier. All inventory receipts should be verified by at least two people and periodic spot checks should be done by someone in management.
• Hotline. We have toll-free hotline (provided by the company we use for payroll and HR) where honest employees can anonymously report suspicious behavior. Many employees are wary of "ratting" on a fellow employee to management but are willing to report concerns to an anonymous hotline. If you don't have one set one up.

What other tips do you have regarding stopping collusion and employee theft? I, and my readers, would like to hear from you. Jim Sobeck is president of New South Construction Supply, West Columbia, S.C. This article originally was posted on Sobeck's Biz 101 blog. Copyright 2011 by Jim Sobeck. All rights reserved. This information may be reproduced as long as full credit is given to the author.