The lessons from Koss

You may have an unauthorized profit sharing plan at your business. A 2008 report by the Association of Certified Fraud Examiners revealed that $994 billion dollars were lost to fraud by employees.

This represents 7 percent of the U.S. gross domestic product. This is an average of $2.7 billion per day in losses to American businesses.

Knowing these statistics, it might not be so surprising to find out that the vice president of finance whom you trusted has been embezzling company funds for almost four years. This is what happened to Koss Corp. in December.
The same thing could happen to your small business. All it takes is one dishonest employee whom you trust to negatively impact your profitability or even put you out of business.
In recent years there have been reports of employees with gambling or drug addictions embezzling large sums of money in order to support their addiction. In the case of Koss, it appears that the theft was motivated by a desire to have beautiful clothes, fancy jewelry and other extravagances.
So how do you prevent this from happening to your company? Michael Sattell, a partner, certified fraud examiner and CPA at Sattell Johnson & Appel, has been called to provide expert testimony in many cases where funds have been redirected or embezzled by employees. He says there are many things you can do proactively to identify potential problem areas and reduce the chances that a dishonest employee could embezzle funds from your company.
For a majority of small business owners, most frauds are occupational, with employees stealing through asset misappropriation or through corruption. Asset misappropriation can take place in many nefarious ways. Theft of cash, skimming and lapping schemes, larceny (the theft of currency after the company has received and recorded it) and fraudulent disbursements are common thefts.
On average, occupational fraud goes on for 18 months before it is detected.
So by recognizing the common warning signs early, your business can prevent a lot of money from walking out the door.
There are behavioral red flags that small business owners should be aware of that typically are associated with dishonest employees. The top two red flags are employees living beyond their means, 39 percent, and employees who are experiencing financial difficulties, 34 percent.
The study performed in 2008 by the Association of Certified Fraud Examiners assigned dollars and percentages to the top areas of small business fraud. These areas are as follows:
  • Fraudulent billing 28.7 percent
  • Check tampering 25.4 percent
  • Corruption 23.1 percent
  • Skimming 20.8 percent

The median loss suffered by organizations with fewer than 100 employees was $200,000. Being proactive and incorporating one or more of these prevention techniques could curtail these types of schemes from even being conjured by your employees.

  1. Develop recruiting and hiring policies that include a thorough background check, including credit checks where necessitated by the position’s responsibilities.
  2. Establish the right corporate culture, one that rewards loyalty and honesty. The tone needs to be set from the top and supported at every level of the organization.
  3. Develop a written fraud policy and add it to your employee handbook. Express in writing, what behaviors will not be tolerated and stress that they will be prosecuted.
  4. Perform bank reconciliations on a monthly basis. Company owners should receive their bank statements directly from the bank. They should review cancelled checks, challenge and investigate any odd or unusual transactions.
  5. Hire a CPA who specializes in fraud detection to review your internal controls and to perform unscheduled reviews of your financial statements.
  6. Set up an independent fraud hotline and encourage your employees to use it if they suspect any kind of fraud.
  7. Insist that employees take their accrued time off. Cross-train employees so they can review another employee’s work.
  8. Consult your insurance carrier and review your employee-theft policy to verify that you have adequate levels of coverage.
  9. Physically secure the company’s premises and assets. Lock your file cabinet drawers, install door passcards, and use a safe. This will make it difficult to steal cash and other negotiable items. Protect your inventory of office and production supplies. Perform regular audits to track usage.
  10. Treat all your employees with respect. Do not give them a rationalization to do you harm.

Finally, it is important to prosecute all thefts, no matter how small. Having a zero tolerance policy deters employees who are considering theft. Many employers after finding they’ve been victimized by a long-standing trusted employee often just slap their hand and let them walk away. Employers owe it to their company and to society, to report these crimes immediately.

They should be encouraged to be on the lookout for fraud. They need to be aware that stealing from the company is stealing from them. To ignore these behaviors simply set your company up to be robbed again by observant employees who notice no consequences for such behavior.
In the Koss Corp. case, an outside source, American Express, tipped them off to the fraud. Their employee was allegedly using the company’s accounts to pay her personal credit card statements.
In the small business arena, tips account for 41.7 percent of discovered frauds. Over 57.7 percent of these tips were from employees and 17.6 percent from customers. Other sources that led to the discovery were by accident 29.6 percent, internal audit 10.7 percent and external audit accounted for 14.3 percent of the detections.
One question still needs to be answered in the New Year, is your company protected from fraud by your employees? The best way to determine if you are properly protected is to bring in an outside expert to periodically review your internal controls and review your financial statements. These few proactive steps will prevent you from having an unauthorized employee profit sharing plan, one that does not include the owner.

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