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Solomon CFO Solutions Blog

Preventing Employee Fraud

In my 30 plus years of business experience, unfortunately I have seen more than my fair share of employee theft or fraud.  The theft has ranged from $5 to over $500,000 and the fraud has been in the millions of dollars. These include:

  • Restaurant employee passed free food to his friends
  • A bank customer service rep ordered a duplicate ATM card for herself and then had the customer give her the pin # so she could make sure the new card for the customer worked. She then helped herself to the cash in the account using the second ATM card.
  • A bank branch manager at a retirement center learned all about the families of her customers. She would renew customer cd’s into her name when they matured and make up phony documents for the customer.
  • A loan officer made fraudulent loans and put the money into her personal account
  • A bank officer sold loan participations without recording them on the books of the bank
  • A bookkeeper hid losses in the company by inflating inventory, receivables and cash
  • Maintenance personnel kept the cash they received from the junk yard for scrap metal
  • The office manager for a physician’s office took cash and paid personal expenses through the business

One study estimates that theft by employees of small businesses totals nearly $40 billion in this country each year. Theft can take many forms including stealing office supplies, time, or cash. Employees can get very creative in hiding losses, especially when they are completely trusted by the business owner. Dishonest employees come in all shapes and sizes, ages and ethnic background – you can’t judge a person based upon their demographics.

In “How to Prevent Small Business Fraud: A Manual for Business Professionals,” the Association of Certified Fraud Examiners cites two key factors that contribute to large losses suffered by small companies – lack of basic accounting controls and a greater degree of misplaced trust. More often than not it is the long-trusted employee who is found to be the thief.

While it is impractical to completely eliminate employee theft, there are many ways to reduce it. The first step is to have the right culture. A positive work environment can deter employee theft and fraud. The business owner that uses the business assets for personal use gives employees the feeling that it’s ok to steal. Enforce written policies that indicate a zero tolerance for theft including outright stealing or falsifying time and expense reports.

Secondly, hire good people. Perform thorough investigations and background checks on employees. Be alert to disgruntled or stressed employees, or those who have are having financial difficulties. Also look for any unexplained significant rises in an employee’s living standards. Be wary of employees who won’t take any time off for vacation or always stay late to complete their work.

The final step is to remove the opportunity to steal by having good internal accounting controls and segregation of duties. It’s critical to have a system of checks and balances and oversight of those responsible for keeping the records or the company’s assets. Good accounting practices include having bank statements opened and reviewed by the business owner or external accountant. The employee who prepares the checks or makes the bank deposits should not prepare the bank reconciliation. Vendor records should be reviewed for phantom accounts. The person who takes orders should be different from the one who handles the shipping.

If you are concerned that your business may be vulnerable to employee theft, consider having a review of your company’s internal controls and industry best practices. We can review your policies and practices to assist you in creating a system less vulnerable to employee theft. Let us come help you protect your business assets. 

Exit Strategies, Transition to the Next Generation, Part II

Many business owners want their business to stand as their legacy and leave it to their children. The transition in leadership from one leader to the next is always difficult, no matter what the situation is. It’s even more difficult when the new leader is the owner’s child.

In order to help make the transition better, there are a number of steps the owner and the family can take.

First, the child should work outside the business for a period of time. I recommend at least four years, and longer is better. By working outside the business, the next leader can gain valuable experience prior to coming into the business. This will give the next leader greater credibility when they come into the business, valuable insight in how others run their business, and many times they will have a much better work ethic than if they just start in the business.

Secondly, there should be a program developed for the next leader to learn the business. If the business is complex, the program should be extensive. The program should include a period of time in each of the major divisions with the new leader both observing and doing the actual work. The purpose of the development program is to both learn the business, understand what it takes for the employees to be successful, and to gain credibility with the rest of the management team and employees. The best learning is done experientially and the new leader must gain as much experience as possible. I even recommend that if the business is complex, the new leader spend some time in the accounting and finance area to gain a better understanding of the business’ finances. While working in the various divisions or departments, I’ve seen that the next leader can bring additional resources to solve problems that might otherwise get pushed aside.

Finally, the owner must understand their own transition out of the business. While it’s easy to say you’ll let the next leader take over, it’s much more difficult to let them lead and make decisions while still actively involved in the business. Consequently, it’s best that the next leader gradually assume responsibility for greater areas of the company. This means that the owner must allow the next leader to make run the area, make mistakes and learn as they go. The owner must come to grips with their transition as they’ve frequently spent their entire life in the business. Letting go is extremely difficult and the transition plan must consider the owner’s needs.

As stated in Part 1 of this discussion, the owner must plan their exit from the business and consider their numerous objectives and needs. It requires a skilled advisor to assist the owner in creating and working their plan which should include personal and corporate financial issues and leadership challenges. Be sure you get the best assistance you can to increase the likelihood of a successful transition. 

Exit Strategies, Transition to the Next Generation, Part I

Over the years, many of us have seen family businesses pass from one generation to the next. However, the transition can be very difficult and is often filled with a number of obstacles. It’s common knowledge that while many businesses successfully transition from the first to the second generation, successfully passing it on to the third generation is rare.

The most important factor in successfully transitioning the business to the next generation is proper preparation and execution of a plan. It can take years to successfully transition a business to the next generation, so the sooner the owner and family start to plan their exit strategy, the greater the likelihood of a success.

In the first part of this exit strategy series, we will focus on one of the obstacles that an owner faces in transitioning the business to the next generation. That is, nearly all of the owner’s net worth is typically tied up in the business leading to multiple problems.

  • Retirement Income - In order to exit the business, the owner must have sufficient income to retire. That means he or she must take out enough cash to fund their retirement. This is frequently accomplished by a combination of retirement plan contributions, continued salary or consulting fees, and a sale of the stock in the business to the next generation. The latter can be accomplished by a combination of the company buying back the stock or the next generation buying it from the parent.
  • Equal Distributions – If the owner has more than one child, then the distribution of the company stock becomes an obstacle. For example, if the owner has three children and only one or two are involved in the business, then the non-participating children want their “piece of the pie.” Giving or selling the stock equally to all of the children can create some financial hardships and relationship issues for both the business and/or the children. As one person put it, how can two children who couldn’t share a $.98 toy now share a multi-million dollar business.
  • Estate Taxes - If the value of the owner’s estate exceeds the unified credit, there may be substantial estate taxes due. Without proper planning, the business may be required to fund estate and inheritance taxes which can hurt the future prospects of the business.

In the next part of this series, we will look at the issues surrounding leadership in the transition.

In order to have a successful transition, the owner must consider their objectives in exiting the business and create a plan to meet those objectives. Owners need to consider engaging with an experienced professional to guide them through the process in order to keep the business running smoothly, guide the family through all of the obstacles they’ll face and coordinate the activities of the numerous advisors.