A small business with few staff members is ripe for employee fraud. I have seen it over and over again. There may be only a few employees in the office, and one trusted employee is in charge of the books. That often includes preparing checks to pay the bills.
A key control in a situation like this is a review of the bills being paid. The check signer, usually the owner of the small business, should compare the prepared checks with the invoices prior to signing the checks. The check signer might also perform the added step of personally mailing the checks, to make sure they go to the right places.
In many small businesses, the check signer never verifies the invoices being paid. Why does this happen? Sometimes it’s laziness. Other times it’s a factor of being overworked and shorthanded. There doesn’t seem to be enough time to do it all. But this simple step, which should literally take fifteen minutes or less each week could stop a fraud-in-progress.
For one criminal defense attorney in Oregon, this was an expensive mistake. His long-time office manager managed to run off with at least $132,000. She worked for him for over 15 years, and was clearly a trusted employee.
The story in The Oregonian reports that attorney Ray Bassel’s office manager and investigator pleaded not guilty to four counts of first-degree aggravated theft, two counts of first-degree theft, and three counts of fraudulently using a credit card. All of these charges relate to an alleged theft she perpetrated for years.
How did she do it? She allegedly had credit cards set up in Bassel’s name and used them for person expenses for almost six years. She paid for things like groceries, haircuts, airline tickets, and meals with the cards. She allegedly hid the theft by paying only the minimum monthly amount on the cards. With only $200 or $300 being paid at a time, suspicions were not raised.
The theft was discovered when the employee was on vacation. The employer opened the mail, and found two personal airline tickets for the employee charged to his card.
Fraud schemes are often discovered by accident, just like this one, and that fact is scary because it emphasizes the lack of controls in many companies. I have seen many such cases, in which a longstanding theft was only discovered because the employee had an unexpected absence or another employee randomly opened the day’s mail.
Clearly, if Bassel had asked to see the actual credit card statements that were being paid with company checks, he would have had an opportunity to see the fraudulent charges much sooner. This emphasizes the importance of matching payments with invoices and account statements to verify the validity of charges and payments.
Internal controls to prevent fraud don’t always have to be elaborate. Simple checks and balances can be put into place to verify the accuracy and appropriateness of expenditures. Even in small businesses, examination of key pieces of documentation by the owner can prevent an expensive fraud from occurring.