Fraud and theft start small.

It starts small and just gets bigger and bigger, until someone notices.

Nearly all the grief our profession has been getting lately stems from the giant fraud schemes and audit failures that make the front page of your daily paper. We read the articles and think they don't apply to

According to the Association of Certified Fraud Examiners, the average organization loses six percent of revenue, or $9 per day per employee, to fraud and abuse. Think about how many sales it takes to recoup that. So why don't we realize the magnitude of these losses? Because they're scattered all over the financial statements.

A little T&E abuse, inventory that walks off, a purchasing agent who has a "special" arrangement with a vendor or a bogus vendor, a salesman who gets bargain prices on purchases because he's giving unnecessary discounts on your product or service--that's all it takes for fraud to invade your company.

Making It Worse

If we grouped all these losses in a line item on the financial statements called "Fraud, Theft & Abuse," we'd pay attention. Unfortunately, we make things worse. How? If our company takes inventory, what do we call missing inventory? "Shrinkage." The inventory doesn't shrink; someone stole it, or it was ruined or given away. Then we compound the problem by burying the missing inventory in Cost of Goods Sold. But it wasn't sold.

Some employees feel justified in taking advantage of a company. Why? Because times are tough and a few friends have been "downsized," and everyone is doing multiple jobs for no increase in pay, while the owner is still living as though nothing has changed. Employees become resentful, and a few will even figure out a way to get even.

Behaviors That Drive Fraud and Abuse

So how do you minimize the probability that your company or firm will fall prey? One way is not to hire employees who will steal you blind. You should do background checks on any employee who can do you harm, especially those with access to assets.

* Do a criminal background check.

* Perform a civil background check. People who are being sued are more likely to do you wrong.

* Check driving records. People who get lots of traffic tickets sometimes like to see if they can break the rules without getting caught.

* Perform a credit check. Employees who can't pay their bills have to come up with the money somehow. It might be yours.

There are hundreds of reasons why employees feel they have a right to your money. But it nearly always involves a "financial stress." So how can you minimize the possibility of employees using your assets for their benefit? Watch for behaviors that require money: drugs, alcohol and gambling are three big fraud risks. Stealing to support an extramarital affair is another major driver. It also could be a sick child, a messy divorce--or simple greed.

Do You Wash Your Hands?

People behave the way they see those above them behaving. The Centers for Disease Control and Chicago's Northwestern Memorial Hospital found that if the senior doctor does not wash his hands while making rounds, the staffers with him will wash their hands only about 10 percent of the time.

Business owners who use the company as their piggybank shouldn't be surprised when employees take what they think is their fair share.

Protect Yourself

This isn't rocket science. The best way to protect yourself is to establish a culture where employees, management, vendors, customers and clients are expected to do the right thing. Then make sure you walk the talk--even when no one is watching.

Fraud: Catching The Crooks Who Cook The Books

Look at the nature of fraud, profile who commits it and why, and learn how to prevent and detect fraud at this upcoming MACPA-sponsored CPE program. It is slated for Friday, July 18 at the Grand Traverse Resort and Spa. Visit the MACPA Web site for more information. Look for Express Code CCCB2-03 for quick access to program information in the CPE section.

Reprinted from New Jersey CPA, May-June 2003 issue, by permission of New Jersey Society of CPAs.

Gary Zeune is a nationally recognized speaker and writer on fraud, and the founder of The Pros & The Cons, the nation's only speakers bureau for white-collar criminals. He is the author of The CEO's Complete Guide to Committing Fraud and Outside the Box performance. He can be contacted at gzfraud@Bigfoot.com, or (614) 761-8911.