Protecting your Business from Fraud and Employee Theft

A couple of weeks ago, I was catching up with ‘Jasmine’, a friend, local business owner and advisory client. Over hot beverages we shared stories on recent ‘learning opportunities’, with our conversation touching on the jailing of the former Government accountant who ‘misappropriated’ (i.e. stole) over a million dollars from the Bermuda Government.

I mentioned that just that weekend, I had read Mark Cuban’s book ‘How to Win at the Sport of Business: If I Can Do It, You Can Do It’, where he described having had a similar experience early in his business career. A trusted staff member had stolen over 95% of he and his partners’ money - $83K out of $85K! Yes, even the great kahuna of Shark Tank,, HDNet, the NBA Dallas Mavericks etc. had experienced the financial and emotional pain associated with this betrayal.

As we were chatting, I could see that Jasmine appeared to become increasingly affected by the direction of the conversation. She then confessed her personal experience.

In brief, her father had owned and operated a small business, supported by capable and loyal staff including a bookkeeper named ‘Pearl’. Pearl had worked for the business for over twenty years. Jasmine remarked that even as a little girl, Pearl greeted her with warmth and would applaud her father with statements like “when they made your father they broke the mold. He is one of a kind”. To make a long story short, when Pearl retired, the new bookkeeper began to pick up on irregularities. Upon further investigation, it was discovered that Pearl had been stealing from the company for many years. In the end, it was estimated Pearl had stolen over $200,000 over more than a decade. To this day they do not know the total value stolen.

My chat with Jasmine inspired me to put together thoughts on how to protect yourself and your business from a similar experience.

1. Theft of financial assets:

The best way to protect against employee theft of financial assets is segregation of duties. Pearl was responsible for receiving customer checks, recording the receipts in accounts receivable and depositing the money. There was no segregation of duties.

The theft could have been avoided by taking the following steps:

• Have the receptionist endorse the checks “For Deposit Only”. This alone would have minimized the opportunity to divert funds.

• Make a control total of the checks before passing them to the accounts receivable clerk.

• Have the accounts receivable clerk record the payments and also make a control total.

• Return the checks and control total to the receptionist. If the two totals agree, the receptionist can deposit the checks.

There are several other noteworthy points for the business owner:

• Make periodic, unscheduled inspections to ensure everything is as it should be.

• Be wary of employees who lavish you with excessive praise. No wonder Pearl was so fond of Jasmine’s father. She was making a small fortune on the side!

• Consider doing background checks before you hire someone. There are a number of cost-effective solutions designed for small businesses.

2. Theft of inventory or supplies:

• If your business has on-site inventory, make sure to take a physical inventory quarterly. If you notice irregularities, start taking inventories monthly. You must isolate the source of ‘shrinkage’. Is it your customers, suppliers or employees? As a rule of thumb, customers, suppliers and employees each account for approximately one-third of inventory theft.

Here are a few preventative actions you can take.

◦ To minimize customer fraud outfit your store with mirrors, cameras, and signage.

◦ To minimize vendor fraud compare purchases orders to the receipt of goods and vendor invoices.

◦ For employee fraud, make certain employees know you will be taking periodic inventories. Since they know you are looking they will be less likely to steal.

3. Business owner responsibilities:

• Protecting against internal or external threats is your responsibility.

• You are not “above the law”. Ensure that procedures are adhered to, including by you! If you are lax, your employees are likely to follow your lead.

• Make periodic, unscheduled inspections in areas of concern.

• Periodically review procedures to ensure adequate segregation of duties are in place.

Kumi Bradshaw helps Bermuda companies measure, grow and harvest business value through his work with Firm Advisory Ltd.

For help with business advisory, brokerage or valuation, email

Squarespace expertComment