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Small Business Embezzlement -- With the Economy Worsening, Watch Out!

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It's every business-owners nightmare -- one of your employees is stealing money from you. You never think it's going to happen to you -- especially in a small company, where you think that you're treating your employees like your family. But, it happens more than you think. Employee theft and embezzlement can ruin an entrepreneur or small business owner.

According to the 2008 Report to the Nation from the Association of Certified Fraud Examiners , U.S. businesses lose 7% of their annual revenues to fraud. That translates to approximately $994 billion in fraud losses. Small businesses are especially vulnerable. The median loss suffered by organizations with fewer than 100 employees was $200,000. That's even higher than what big companies lose on average. Check tampering and fraudulent billing were the most common small business fraud schemes. This is putting a lot of businesses out of business -- One-third of all business bankruptcies are due to employee theft, according to the U.S. Chamber of Commerce. And at least 20 percent of all business failures are the direct result of employee theft, according to the American Management Association.

The most common things to look out for: employees living beyond their apparent means or experiencing financial difficulties at the time of the frauds. What does this mean in today's economy where so many people may be facing financial difficulties? Even more reason to be vigilant!

Jay Myers learned his lesson the hard way. In 2003, Jay Myers was the founder of a successful Memphis-based video-conferencing firm Interactive Solutions, Inc. He had 16 employees and sales of over $5 million. He had made the Inc. list of fastest growing companies in the country and business was going well. But, personally, he was recovering from a crises -- his beloved older brother, who had been a mentor to him (and headed up the Memphis Better Business Bureau, ironically!) had died very unexpectedly. Myers took his eyes off the ball for a bit. By the time he woke up, he realized that his bookkeeper had embezzled over $250,000. How did it happen? He did a lot of the right things, but missed a few key checks and balances. He also was a little less careful and more trusting when he was getting over the loss of his brother -- he thought that his employees were looking out for him. The good news is that the bookkeeper ended up in jail, he got a portion of the money back and he maintained the loyalty and support of his other employees. But, he was still out a lot of money and it did a lot to affect his trust.

I spoke with Jay on our Launchpad segment this week on WOR Radio. It really made me think, especially because I'm hiring new employees for my latest startup and we currently outsource all of our bookkeeping to our accountants. Jay had done criminal background checks on all of his employees and even paid auditors to do a complete audit. What I learned today is that if you really want to be thorough, especially for someone handling your money and/or working with children, you have to do a civil background check as well as criminal. In Jay's case, the woman had several civil cases for embezzlement pending, but no criminal record. He later found out that she had stolen over $2 million from several businesses over the course of several years!!

Jay came out with a book about his experiences. Keep Swinging: An Entrepreneur's Story of Overcoming Adversity and Achieving Small Business Success.
Some tips from Jay:
1) Perform criminal and civil background checks - A Certified Fraud Examiner does a civil check in addition to criminal check.

2) Purchase fidelity bond insurance coverage - Luckily, Jay had this in place when he discovered the problem. It didn't cover everything, but it helped.

3) Require two signatures on checks - The more people involved with processing the check for payment, the less likely an embezzlement will occur because collusion is necessary.

4) Review all bank statements - If possible, open the statements yourself before the bookkeeper gets to them.

5) Submit your system to yearly outside reviews - Have an independent CPA firm evaluate your accounting systems annually, and take their suggestions for improvement seriously.

6) Make sure all employees who handle the finances are bonded - This may seem like an unnecessary expense for a small business -- but penny-wise, pound foolish as they say. It's a good investment in the long run.

7) Require employees to take a vacation - This was one I hadn't thought of. Sometimes, things that you may have overlooked become more obvious when the criminal is not there to hide things.

8) Finally and surprisingly, the people to contact if you suspect a problem is Secret Service - Don't call the local police (like Jay did at first). Believe it or not, corporate theft falls under the Secret Service's jurisdiction.