Wrong strategy + wrong people = fraud or worse
By Gary D. Zeune, CPA

As the owner of a chiropractic practice, you are a small-business owner. Imagine for a moment that you spend years of hard work building your business, only to discover a long-term trusted employee is ripping you off.

You don't think that could happen? The average business loses 6 percent of revenue or $9 per day per employee to fraud, theft, and abuse.¹ Make no doubt about it: That's a significant amount of money.

So what's the best way to prevent people from robbing you blind? Here are a few suggestions:

• Don't hire thieves! To screen out the bad apples, do a background check on all job applicants.

For example: People with financial problems are more likely to steal, as are people with drug, alcohol, and gambling problems. And most common are employees having extramarital affairs. Think about this: If an employee will cheat on his/her spouse, what makes you think he or she wouldn't cheat you by stealing your money?

Many state laws require employers to make a clear and conspicuous disclosure to an employee or job candidate that a consumer credit check will be conducted. Informing job applicants up front of the check is also an effective screening technique.

Half of the applicants who read the notice hand the application back, so many of the people who might steal from you don't even apply for a job because they know they won't pass muster.

Even if you screen your employees, it's no guarantee against being ripped off. Three things — the triangle of fraud — are needed for an employee to steal: need, opportunity, and rationalization.

Employees who steal often feel exploited or underpaid. For example: Employees often think, "They're paying me $10 an hour, and making $70 off me. I deserve more." It's a typical justification.

• Put in strong internal money controls. Protect your money with strong internal controls. The same person should not handle incoming and outgoing funds.

One of the easiest, and zero or low-costs controls, is to have your business bank statement sent to you at home so you can review the transactions. Be alert for missing expenses (like not paying sales tax). This is a preventive control.

In addition, no matter how busy you are, review and sign every check that goes out — a detective control.

• Pay people right. A defective compensation system will get you sued. Have you ever heard, "People behave the way you pay them to behave"? That is, your compensation system is the primary driver of how employees behave.

Compensation systems are supposed to motivate people to work, but defective systems can drive illegal or dangerous behavior that puts the company at risk of a lawsuit.

For example: Long-haul drivers are typically paid by the mile, without additional pay for hours spent waiting for shippers and receivers to load and unload their trucks.

It's estimated that 80 percent² or more of drivers comply with the federal regulations. It's an open secret in the trucking industry that some drivers maximize their incomes by breaking the speed limit and by driving more hours than permitted by law.

If that pressure results in an accident, the driver, the trucking company and, in some circumstances even the receiver, could face a multimillion dollar lawsuit.

After a number of lawsuits for auto accidents involving delivery drivers, Domino's Pizza, Inc. learned its lesson about its compensation strategy. About 10 years ago, Domino's had a 30-minute delivery guarantee. To encourage drivers to arrive at the customer's house with the pie, some stores paid drivers a bonus of 1 percent for delivering a minimum number of pies on time, according to testimony from one employee.

The system cost Domino's a lot of money. In 1993, the company reached a $2.8 million settlement with the family of an Indiana woman killed by a delivery vehicle that was allegedly speeding to meet the 30-minute guarantee.

Later that same year, a jury awarded a St. Louis woman $750,000 in actual damages, plus $78 million in punitive damages. She was injured by a Domino's driver who ran a red light. Rather than appealing, Domino's and the woman later settled for an undisclosed amount. The company ended its 30-minute guarantee a few days later.

TIPS ON AVOIDING PROBLEMS

Experts could probably come up with a "zillion" ways to get employees to do the right thing. Here are a few that are easily implemented in a small business:

Gary D. Zeune, CPA, is the founder of The Pros & The Cons, a firm that trains organizations on fraud prevention and detection. He also teaches fraud classes for the FBI, U.S. Attorney, bar, and healthcare associations. He can be reached at gzfraud@bigfoot.com, at 614-761-8911, or through the Web site, www.TheProsAndTheCons.com.

SIDEBAR:
Embexxler costs company millions

References

¹ 2004 Report to the Nation on Occupational Fraud and Abuse, Association of Certified Fraud Examiners, www.acfe.com/documents/2004RttN.pdf

² Gary Green, "Compensation systems at heart of many a court case", Business First Columbus, August 20, 2004.