When a fraud has been committed in a small business, one of the hardest parts is accepting the fact that someone you trusted has stolen from you. That takes an emotional toll on everyone.
Once the business owner gets past the acceptance phase, it is likely anger will take its place. In fact, the process is very close to grieving. But what about the costs to the company itself, such as the financial strain, the impact on other employees and the health of the overall organization?
Let’s look at the costs to the victim(s).
Assume a business owner found out their warehouse manager was stealing lumber to build an in-law apartment on their existing home. The crime was discovered when the manager had lunch with the bookkeeper one day and disclosed he was adding an apartment because his mother-in-law wasn’t doing well.
The bookkeeper is friends with his wife and called her to see how she was doing. She also went to her friend's house to support her and discovered the addition had the same specialty windows that were exclusive to the company they both worked for.
Knowing what the warehouse manager made for a salary, the bookkeeper became suspicious, because the windows were super expensive. She then went to the accounting records and discovered there was a purchase order specifically for the number of windows in the new addition. She notified the owner right away, and an investigation began.
According to the Report to the Nations (ACFE), asset misappropriation such as this one consists of 89 percent of all occupational fraud cases. In addition, the median loss for these crimes is $114,000! For a small business owner, this could mean a permanent shutdown.
In this case, the specialty windows were $8,200 a piece, and there were 10 onsite. That is $82,000 of inventory paid for by the company and not recouped through a sale. This theft immediately became costly.
Worse still, in addition to the $82,000, there now needed to be a full inventory count by an outside professional, legal costs, the loss of the manager and countless other costs to manage this theft.
Additionally, we must consider the impact on the bookkeeper. She was friends with the manager and his wife and cared for them. Never would she imagine he would steal from his employer. The disappointment experienced by the bookkeeper had a significant impact on her ability to trust the other employees. Now, it is also possible other warehouse workers will be questioned and considered potential witnesses and/or also suspected of stealing lumber, causing a poor work environment due to a new lack of trust.
The overall health of a business that has been affected by an occupational fraud can decrease at a rapid pace. It is important for the owner (assuming they aren’t the one to commit the crime) to communicate on a regular basis to the remaining employees to reassure them the company will be making changes to reduce the risks of another occurrence, that the business is going to survive the crime and that the employees who remain are important. These are critical steps to retaining team members and ensuring continued operations.
In any case, a fraud committed by an employee can be financially and emotionally devastating. It is critical that we, as trusted advisors, make it our mission to help prevent occupational fraud for our small businesses. Join me in fighting this common crime on my new website.
Dawn is a Certified Public Accountant, Certified Fraud Examiner, and CEO of Powerful Accounting, LLC. Powerful Accounting is a nationally recognized accounting, tax, forensic and fraud, IRS and State Agency audit professionals as well as a QuickBooks consulting firm. Recently, Powerful Accounting has partnered with Anderson, Brolin & Coba...