It is often said that the most valuable asset of a business is its people.  I am going to take a slightly different view and suggest that while employees are a very valuable asset, they are not the most valuable asset.  Rather, I am going to suggest that a company’s systems and business information are its most valuable assets. After all, employees come and go, but solid systems and protection of your business information ensure that the success of your business is not disrupted by a staffing change.

The COVID-19 pandemic has had a record devastating impact on people throughout the country.  Unemployment is at a record high having increased from an average of 4% in 2018 and 2019 to as much as 14% in 2020.  According to the Bureau of Labor Statistics, the rate remained at 11% through June 2020 despite efforts to reopen the economy.  Foreclosures and evictions are expected to dramatically rise once the moratoriums expire, and bankruptcies are expected to increase once the PPP loan and stimulus monies dry up.  The take away is that once honest people may become dishonest due to desperation arising from large medical expenses, spousal unemployment, Amazon spending addiction during the pandemic (yes, that’s a thing!), or living above their means and being caught by the economic downturn.  The Association of Certified Fraud Examiners’ survey on the level of fraud in the wake of the Corona virus reveals that as of May, 33% of respondents have observed an increase in employee fraud.

Good financial systems within a company can significantly reduce or eliminate the temptation that leads to honest people doing dishonest things.  As a business owner, if you have a “trusted assistant” (other than your spouse) who handles all aspects of your bookkeeping and financial accounting, you do not have a “system” in place, but merely have a plan to lose money.  Red flags that you need better financial systems are (i) you have one person (or even just two) who has complete responsibility for payables, receivables, payroll, check signing, and account reconciliation; (ii) you allow an employee to sign checks with a rubber stamp or electronic signature; (iii) account statements are not reviewed and/or reconciled by the business owner or person who does not have check writing authority; and (iv) you do not receive or review detailed, not summary, financial reports on a regular and systematic basis.  “Credit card” can be substituted for “check” in each of the above instances.

When people get desperate, they will often look for ways to relieve their monetary stress.  Since they cannot make more, they may look for ways to take more.  And, if they have control over your finances, one place from which it can be taken is the company bank account.  Some of the ways in which you can be victimized are:

• The trusted assistant creates a sham LLC or fictitious company through the use of an assumed name filed with the county clerk’s office.  Checks are then written to the sham company as a “vendor” on fraudulent invoices even though no goods or services are provided.

• The employee writes a check to pay a legitimate vendor, but while the ledger shows the vendor as the payee, the check is actually written to the employee or a sham company.

• The assistant takes checks payable to the company for receivables, enters the deposit in the ledger, but deposits the checks into a personal or sham company account with a remarkably similar name with a fake endorsement and even without an endorsement.

• Credit card charges or checks for personal items are coded as business expenses.

• Customers are overbilled with a small fee or markup that is then diverted by the employee when the invoice is paid.  The company records are doctored to hide the difference.

• In retail businesses where cash is accepted, employees can void transactions at the register and pocket the cash.

In each instance, the theft will be small at first, and will gradually increase as the employee becomes more confident in the scheme.  Over time, the amounts can become significant both in terms of individual items and in terms of the aggregate loss.  In one case I litigated, the employee deposited 183 checks payable to her employer into her personal account.  Even though none of the checks were endorsed, and the name of the payee did not match the name of the account holder, the bank allowed the deposits without question.  The result was a loss to the employer of more than $300,000 over 18 months.  In all of these cases, when the embezzlement is discovered, the employee will not have the money or ability to repay it.  While the banks may have some liability, the process to recover from them can be time consuming, tedious, and expensive. No matter how you cut it, the result is a loss for the employer.

Some people think that their bank’s processing system will protect them from embezzlement schemes involving checks.  The truth of the matter is that they do not.  Virtually all check processing at banks is performed electronically, and banks have determined that the cost of manual check processing far exceeds the cost of fraudulent checks getting through the system.  Thus, you cannot rely on your bank to protect you. Moreover, a credit charge by an employee may not be considered an “unauthorized charge” by the credit card issuer if the employee was an authorized user of the card. Thus, it is up to the business to implement good systems to reduce the risk of such losses.

The key to reducing your risk is to have good systems in place that are followed religiously.  Do not let assistants sign your name to contracts and other documents via DocuSign or other electronic signature systems.  Avoid the use of rubber stamps for check signing.  Require that each check be accompanied by an invoice at the time the check is signed.  Do not concentrate financial responsibility in one person – separate payables from receivables handling for example.  Place responsibility for reconciling statements in the hands of another person, preferably the business owner.  Audit credit card statements and bank accounts on a regular basis, at least quarterly and even monthly.  Avoid providing employees with credentials for online banking, and if you must do so create separate login credentials for each user so their activity can be tracked.  Direct vendor payment inquiries to a person other than the employee who pays your accounts payable.  Computer access to financial information should be password protected and available only to those who have a need to know.  Moreover, no financial information should ever be located on an employee’s personal computer or device for any reason.

If you begin to notice any of the following, you should immediately take a deep dive look at things to understand why they are happening so any dishonest conduct can be stopped before losses mount:

• Profits shrink for no apparent reason

• Vendors complain about not receiving payment

• Customers report that they paid invoices that are “unpaid” in your system

• Odd transactions, unusual checks, or out-of-the-ordinary credit card transactions are observed

• The trusted assistant insists on working alone, never takes time off, works strange hours, is possessive about company financial matters, or tries to prevent others from accessing information

• An employee is living above obvious means or appears distressed for financial reasons or reasons that are not apparent

Smart money dictates against leaving a car unlocked and running with the keys inside.  Similarly, smart money dictates against leaving the keys to the businesses laying around as a temptation.  Like money sitting out on a table with no guard, access to your company’s money can tempt honest people into doing dishonest things.  Employee embezzlement is one of the 20% of causes that can easily cause 80% of your problems.  Recognize the need for a good financial system, and implement one to reduce or eliminate the risk of employee embezzlement.  Make your system one of your most valuable assets.

In the next installment, see how business owners can protect their business information and maintain competitiveness in the market place.