Crain's New York Business

April 12, 1999

STEPPING UP SECURITY  SO CRIME DOESN'T PAY:  FRAUD COSTS FIRMS $400 BILLION-PLUS  

William Callahan has news for business owners who doubt that one dishonest employee can seriously damage a company. The chairman of Manhattan-based United Intelligence Group Inc. points, for example, to the case of the Connecticut coffee company with an inexplicable sales dip.

Called in to investigate, Mr. Callahan, a certified fraud examiner, discovered that a trusted longtime employee had been diverting coffee products to his own warehouse. There he had set up his own distribution network, and was quietly generating revenues that rivaled his employer's. All told, the scam cost the coffee company over a million dollars.

Street crime may be falling across America, but fraud against firms remains all too common. In total, it costs companies large and small more than $400 billion annually. The Association of Certified Fraud Examiners warns that small businesses can be especially vulnerable. In a recent examination of 2,500 cases of employee fraud, the association found that businesses with under 100 employees suffered a median loss of $120,000 per occurrence.

To prevent those losses, experts advise business owners to take a few simple precautions, ranging from making sure that at least two pairs of eyes regularly look over the books, to checking employee resumes, to communicating strict guidelines on honesty. The problem is that some smaller companies may lack the resources to do everything they probably should.

Experts advise that even halfway measures, such as an occasional second look at the ledgers, can make a difference. Fraud, though, can be tough to spot. In one Manhattan-based company with 30 employees, an unsupervised bookkeeper stole in excess of half a million dollars by siphoning off small amounts of cash over the course of a decade. The situation went unnoticed until the bookkeeper went on vacation and a temp noticed odd addition errors.

Case of over-dedication

In that case, the company called in forensic accounting firm Michael G. Kessler & Associates Ltd. to investigate. ''You want to make sure that employees take vacations,'' says Mr. Kessler. ''If they don't want to go away, you've got a problem.''

According to many experts, the first step to avoiding fraud involves making sure that employees are who they say they are. ''It's extremely important to know who you're hiring,'' says Anthony Luizzo, a member of the board of directors at Accufacts Pre-Employment Screening Inc. and president of the New York chapter of the Association of Certified Fraud Examiners.

Mr. Luizzo advises business owners to run background checks on staffers. He warns that those efforts should be more extensive than simply calling an employee's references-especially if that person will handle money.

25% of resumes doctored

Such checks need not break the bank. In fact, Mr. Kessler says, they should cost no more than $50 to $75. Since he has found that 25% of applicants lie on their resumes, listing degrees never earned and positions never held, he advises that it is money well spent.

Another important step is to separate accounting duties so that one employee doesn't have sole responsibility for tracking the company's finances. This may present a challenge for some small businesses where there simply aren't enough trained bodies to allow for such checks and balances. In those cases, the burden may fall back on the owner.

''Unfortunately, the owner of the business has to be more involved in the day-to-day bookkeeping,'' says Mark Gottlieb, a forensic accountant from the American Board of Forensic Accounting.

Employers can get started by taking some simple steps, such as having all bank statements mailed to their homes and reviewing canceled checks and deposit activity monthly, advises Tom Rafferty, a partner at Fairfield, N.J., accounting firm Mintz Rosenfeld & Co. Owners should question and review all large and unusual transactions, including bank statements, he says.

The owner also needs to communicate company policies to employees and make them aware of the consequences of certain actions. As part of that effort, the employer must set a good personal example. Bosses who regularly pocket cash from some sales in order to evade taxes just might find their employees following that example, says John Bonora, a certified fraud examiner who works at litigation consulting firm Margolin Winer & Evens.

And if all else fails and fraud does occur, companies also need to follow through and prosecute dishonest employees, says Mr. Kessler. He adds, ''They've got to let people know they mean business.''