Starting a business is risky under the best of circumstances. Approximately 50 percent of businesses fail in their first year, and that number rises even higher over five years. There are many reasons businesses fail, but the cause in up to 35 percent of those failures is shocking: employee theft.
How can you make a million dollars and go broke? Lose a million and one.
When I started my construction company in 1993, I did my own bookkeeping. In 1999, my company revenues exploded from $100,000 per year to nearly $2 million, so I hired accounting help. Not knowing how to set up accounting controls cost me at least $1 million in fraud losses and related expense and cost my bright young accountant nearly three years in prison. Although I learned many things from the experience, here are three of the most important.
Faith, Friendship and Family Are NOT Accounting Controls
They are relationships—and you must never confuse them!
I trusted my accountant completely; it never occurred to me to check up on her. I reviewed our finances regularly, without once considering that what she was showing me might not be true. Accounting controls would have protected both of us—her from temptation and my company from theft.
Some experts believe that family members commit 35 percent of reported embezzlements. Additionally, as people become friends, a natural sense of trust develops. Having researched thousands of embezzlements, I am no longer surprised to hear a blindsided owner say, “She was the most trusted person in the company—I can’t believe she did this!”
Always Look at Source Documents
Source documents are direct from the original source, and you must always be the first person to touch them. The best way to do this is to pick up and process your own mail. I thought that having an accountant do this was a way to be efficient, but in reality, it allowed her to commit fraud and hide the evidence. When calculating the amount of money I lost versus the time it would have taken me to process the mail, I found that doing it myself would have saved me around $2,500 per hour.
Few business owners realize how easy it is for the person who handles the mail to steal money and documents. Now that you know, take charge of it.
Control Your Check Stock
Check forgery is used by more than 35 percent of embezzlers and costs American businesses about $182 million each year. Embezzlers don’t need fancy schemes; they make millions by simply forging signatures on pilfered checks. I sometimes joke that, before my embezzlement, I kept my guns in the gun safe and my checks in the desk drawer. However, now that I’ve lost a million dollars, I keep my checks in the gun safe and my guns in the desk drawer—and I feel much safer!
Although the use of paper checks is in decline, check forgery remains one of the biggest threats to small businesses in America. Lock your checks up securely, and keep a log to track the ones you remove. Note voided or spoiled checks, and watch your bank account for transactions that don’t match up.
The average embezzlement lasts nearly five years and costs the victim company around $1.4 million. Additionally, a small business is much more likely to be embezzled from than a larger company is. No one ever sees it coming, and the consequences go far beyond the dollars lost. The emotional impact of having a person you trust violate you in this way cannot be described. In my case, realizing that, had I known what to do, I could have prevented the whole thing in less than 20 minutes a day made it even worse.
Although things were rough for a couple of years, I am one of the lucky ones—my company survived. Many do not. Even worse, in many cases where businesses are destroyed by embezzlement, the owners are also personally bankrupted.
Don’t let your company be the next sad statistic. Set up controls, get your own mail and lock up your checks today.