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Fraud Prevention Tip: Change the Standard by Which You Check Your Transactions

My last tip concerned reviewing the payroll, but anybody running a business knows that’s far from the only expense that fraudsters can tamper with.

Many companies have expense reports. Sometimes they come from traveling consultants or a sales force. Other times they’re the domain of local managers who take associates and leads out for meals and entertainment. Whatever it is, expense reports get handed into the appropriate department, reviewed by the person in charge, checked off and paid out.

However, what I’ve seen is that for every salesman and consultant who has his expense reports checked, there is someone whose expense reports are getting glossed over: C-level and other senior employees.

There are rarely checks and balances on these people. Sometimes the CFO is even writing his own checks – and that’s a problem. All systems require checks and balances – a theme you’re about to see resurface again and again over the course of these coming posts – and when it’s assumed that senior managers’ and officers’ expenses don’t require review you’re going to run into problems.

The CFO at a manufacturing company in Suwannee, GA knew that the golden audit number for an automatically reviewed expense was $5,000. Thus, he was writing himself tens of thousands of dollars in expense-related checks, each in the mid $4,000 range.

The mistake the company made was that these checks took two signatures but the senior person who was acting as the co-signor on these checks wasn’t double checking what he was signing. We found $180,000 worth of recent fraud. Lord knows what had been buried for ages.

The reason I suspected this was happening is because the CFO dragged his feet about getting us some of the information we wanted during our review process. That raised my concern about other issues he was and wasn’t sharing with me.

When I go into a company that’s losing money I always look at the expense reports of senior people, and when these two issues crossed I easily discovered what was happening.

Make sure that any check co-signor or anyone whose job it is to sign off on checks and expense reports understands the seriousness of what he or she is doing and doesn’t make the action a perfunctory one. You want people in those positions who ask questions, are naturally suspicious and who are willing to bring larger issues straight to the CEO.

Change the standard by which you check your transactions.

Auditors set their own level of what kinds of transactions to review and at what number (in this case, $5,000). Though auditors will occasionally spot check below that number, make sure they’re regularly peeking at any transaction above 80% of that number (in this case $4,000). I’ve found that to be, more or less, the sweet spot of those committing this kind of fraud.

What level do your auditors automatically check? What will you have them do now?

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Fraud Prevention Tip: Always Have Someone Double Check the Payroll

There are a number of good payroll services out there that will handle all of your payroll needs. All you do is enter employee hours or salaries into the system and – poof! – everybody gets paid on Friday.

Many businesses opt not to engage a service like this; perhaps they don’t like the technological integration, perhaps they like to keep things in house, or maybe they just don’t know such services exist. Whatever the reason for not contracting out one’s payroll, if you do payroll in house, make sure someone is double checking the work.

And that brings me to Aunt Tess.

Aunt Tess was a payroll clerk I once had the pleasure of encountering. She’d been working at the same company doing the payroll for over 25 years, and everybody loved Aunt Tess. After all, that’s why they all called her Aunt Tess.

Well, I suspected something fishy was going on when Aunt Tess came into work the day after an appendectomy to do the payroll. There she was, just handing out pay checks as if 18 hours earlier she hadn’t been split open unconscious on an operating table.

Really, Aunt Tess? Not even a day of recuperation?

I inquired and learned that in 25 years Aunt Tess had not missed one single payroll day. Not one. Does that strike you as bizarrely as it struck me?

At a big company, no one knows all the hourly people’s names, and this was a fact that Aunt Tess had been methodically exploiting for a quarter of a century.

As it turned out, she’d created a handful of specious hourly employees, whose concocted existence allowed her to steal between $75,000 and $100,000 a year. She’d just hand out checks, hold on to her unknown friends’, and deposit them into bank accounts that she controlled.

It was both elaborate and simple. Considering the love for Aunt Tess both from management above and employees all around, everyone was quite shocked to learn of this betrayal, and their inclination to forgive her is something we’ll explore in future tips.

But for now, I’ll leave you with a reminder of this tip: Always Have Someone Else Double Check the Payroll. You never want just one person doing your payroll.

Do you have just one person doing your payroll? What kind of check will you put in place now? Let us know in the comments below or ask questions if you need some suggestions.

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Fraud Prevention Tip: Keep Your Security Room Locked

When I prepped you for this series on fraud, I mentioned that some of the tips were going to seem a little obvious. This opening tip should seem head-slappingly “duh,” but you’ll have to believe that the example is nonetheless true.

I was working on a company in Dallas where all the surveillance equipment was kept in one room. Logical, right? But delightfully for those interested in doing wrong by the company, this so-called surveillance room was kept unlocked all the time.

That may be fine in these days of digital data automatically uploaded to secure servers and kept for months, but this was back in the days of video cassettes – a time when the data was in one place at one time and easily destroyed.

As you can imagine, this place had a theft problem. And after people would steal something, he would walk right into the surveillance room, change the tape or erase it; and sometimes before committing a crime the thief would just stop the VCR for the duration of his crime.

So, my Fraud Tip:

Keep Your Security Room Locked.

Do not let this happen to you! Having security equipment is great, but you have to secure the security equipment.

Is your security room kept locked or unlocked? If you don’t know, please go check right now.

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Fraud Prevention Tip: Leverage the Value of an Informal Fraud Policy

We’ve been talking about fraud, and last week I asked you to create a fraud policy if you didn’t already have one. Pardon me for assuming that you don’t already have one but experience tells me you don’t. What you may find that what you do have, though, is an informal fraud policy – and you may not even know it.

Though I insist that an official, stated, written and shared Fraud Policy is important, I will be happy knowing that you also have an informal fraud policy.

An informal fraud policy is one that is implied by your actions and the state of things around your business – like security – but that is not directly stated. An informal policy is also known as a psychological fraud policy.

The Circuitous Route

I once ran a retail chain out of Delaware. The shrinkage was 5 or 6%, and when the company was doing 100 million dollars a year in business, we weren’t talking about an insignificant number here. That was about 6 million dollars a year of stolen goods.

Before I got there, when a cashier or sales associate was caught stealing the manager would have that person quietly taken into the back, loaded into a police car and inconspicuously taken to jail. But this is not Victorian England, and we need not be so discreet.

When I started running this operation and I caught someone stealing, I had multiple police officers parade them through the store in hand cuffs in a circuitous route. The police car would be out front lights swirling and sirens blaring, and the perpetrator would have tears coming out of his or her eyes. I wanted everyone to see, from employees to customers to management.

The Effects of the Roundabout Way

That policy resulted in a reduction of shrinkage by 50% in the first month. Over the course of the year that translated into three million dollars saved because people became far more terrified of the embarrassing consequences of getting caught stealing. They knew that I would take real and serious action against them and prosecute them for stealing.

Another example of a psychological fraud policy is a warehouse at which I had a ton of merchandise walking out the back door. All I did was stick a camera right outside that door, drill a hole in the wall and feed a little wire through. That camera and wire didn’t even go anywhere! They weren’t hooked up, but just putting it there scared everyone enough to stop stealing. Shrink declined immediately and dramatically.

Those are examples of informal and psychological fraud policies. Neither is stated in words on a sign, but they are actions that are regularly being taken agains those who are stealing and committing fraud, and employees understand the consequences of those actions.

Do you have an informal or psychological fraud policy at your business? If so, what is it and if not, what sorts of measures could you put in place to have one?

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Fraud Prevention Tip: If Someone Commits Fraud, Have Them Thrown in Jail

One thing I consistently find to be true is that, from a legal perspective, 75% of people who are caught stealing and committing fraud are first time offenders. That’s not because it suddenly occurred to them that they could steal and supposedly get away with it; these are people who have been caught in the past but who were never prosecuted.

That’s right – people catch other people stealing money and inventory from them and don’t use the law to prosecute them, whether for restitution or punitive reasons.

Why Don’t People Prosecute?

People don’t prosecute for a few reasons.

1. It seems easy for us to say, “Oh my gosh. Someone was stealing from you? You had them arrested and sued them, right?” After all, if someone broke into your home and stole your grandma’s diamond necklace, you would sue them, wouldn’t you? Of course you would, but for some reason when people work for us and we feel like we know them, we want to forgive them and not mess up their lives, so we fire them – but we don’t prosecute. However, if people don’t go to jail, they don’t learn their lesson (this isn’t some legalistic philosophy I stick by – this is based on the experiences that I’ll flesh out more below and in future posts).

2. Prosecuting seems messy. It creates paperwork, involves lawyers, and it takes time, energy and more money, and you’d rather not lose more considering that someone’s been stealing it already, right? Wrong. You can get some of that money back if it can be had, and the mess is worth the trouble.

3. It’s embarrassing. People think it’s embarrassing that someone was stealing from them and they didn’t uncover it sooner. They don’t want other people to know, whether employees, the public, friends or family. They don’t want a big deal made, attention attracted, ill will and weird feelings. It seems icky somehow and people seek to avoid the associated feelings.

What Are the Consequences of Not Prosecuting?

When people don’t prosecute it hurts everyone and it’s bad for the larger business world. In the long run, when people prosecute it benefits everyone, from employers and industry to the average honest worker who deserves a job for which he’s not competing against thieves.

One of the biggest problems of not prosecuting those who steal and commit fraud is that you can’t say to their next potential employer that they’re thieves. Legally, if you fire someone for theft but don’t prosecute in a court of law, you can’t say that he’s a thief. That means you have to say that you chose to part ways amicably or you will be seen to be impeding his ability to acquire gainful employment without legally proving the reason he doesn’t deserve it. The word that comes to mind here is poppycock!

Prosecute thieves and those who commit fraud to ensure that you can tell future employers the information that they deserve to know. Then you can let those employers make informed decisions about who to let in their businesses.

Again, those who commit fraud aren’t first time offenders – they’re just getting caught for the first time and prosecuted. Do us all a favor and make sure people are prosecuted for their crimes.

Have you ever prosecuted someone for fraud? What happened?

Have you ever chosen not to prosecute someone for fraud? Why not?

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You’re Serious? You Don’t Have a Fraud Policy?

Though I could believe it, I was still shocked when I spoke recently to a group of over 200 CEOs, not one of whom raised his or her hand when I asked who had a fraud policy. Disheartening still was that most people didn’t even know what I meant when I asked the question.

What is a Fraud Policy?

A fraud policy is similar to a mission statement and core values. Most companies have a mission statement. It says something to the effect of why the company exists and what it was formed to do at the highest level. Core values might further flesh out those elements of a company’s attitude and approach that are indispensable to its running successfully year after year. They might deal with product quality, customer service, community interdependence and so forth.

If you go into any Whole Foods, for instance, you’ll see the mission statement and core values on huge signs near the checkout area at the front of the store. Many companies even spend tens of thousands of dollars (or much more) hiring consultants to perfectly craft their mission and values.

Similarly, a fraud policy clearly states – for all to see – the approach a company takes towards those who commit fraud, steal, lie or cheat.

For instance, a fraud policy could state something like, “If you steal, you will be prosecuted to the fullest extent of the law.”

Why Don’t Companies Create Fraud Policies?

With all that time and energy invested in mission statements and core values, why don’t companies take ten extra minutes to tack on a Fraud Policy and then display that at the front of their stores, websites, factories and warehouses?

In short, I think they don’t know they should. So let me be the first to tell you that you should. Every single company should have a fraud policy.

As you can see, it doesn’t take long to come up with a Fraud Policy, especially since it doesn’t need to be perfectly crafted and expertly displayed. Crudely stating, “If you steal, we will throw your butt in jail so fast it knocks the shoes off your next of kin,” would be sufficient. The point is to share the very direct fact that no one will get away with fraud or theft, and if people do steal from you they will be caught and they will be prosecuted to the fullest extent of the law.

Let’s Make a Plan

So, this week, I want you to take the time to make an official fraud policy. Display it, own it and love it.

In addition to putting that on your to-do list, we’re going to put some things on The Turnaround Authority To-Do List. To honor Fraud Prevention Month, we’re going to address numerous issues about fraud throughout the month of March, and even continue well into April since preventing fraud is a year-round process.

In coming posts I will discuss the importance of prosecuting perpetrators of fraud and the values of an informal fraud policy. I will also share a dozen tips and ways that you can prevent fraud, things that you should watch out for, and much more.

If you know other business owners or managers then this is the time to forward them a link to this blog, and if you haven’t yet subscribed to The Turnaround Authority, I encourage you to do so as we prepare to prevent fraud and make the business world a safer and more honest place.

So, I ask you to share right here: what is your Fraud Policy and what are you doing to spread it throughout your company?

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What Are You Doing for Fraud Prevention Month?

“Every young man would do well to remember that all successful business stands on the foundation of morality.”

– Henry Ward Beecher

This quote seemed like a good way to address the month of March, which is National Fraud Prevention Month. Last year, I wrote the following post encouraging you to be aware of fraud and to seek it out.

As I’m fond of saying, if you haven’t found anyone at your business committing fraud, you’re just not looking hard enough.

If your controller is required to look at only transactions above $5,000, during the month of March encourage him to look at all transactions over $4,000. Think about it. If someone wanted to steal money and knew that all transactions over $5,000 were routinely reviewed, wouldn’t that person steal money in the amount of, oh, say, $4,999?

If you’re saying, “No way!” you better believe that I have uncovered more than one case of fraud on just this basis.

Here’s something else I would like you to do for the month of March: kick your CFO out. No, not permanently (well, hopefully not permanently). Just ask him to leave for 2 weeks. Perhaps right before taxes are due is not the best plan for some businesses, but perhaps his vacation is coming due just after that. If this is too short notice GOOD! You don’t want him to be aware this is coming. You just want him out for two weeks.

Now you do his job. Sit at his desk. Open his mail. Talk to his secretary or assistant. And don’t let him back in the building for any reason. Just see what comes up – trust me.

If you don’t find anything unusual, wonderful. Be glad you did this and move on. But if you do find something, know that you’re not the only one out there who did. This is one of the number one ways I uncover fraud, and I encourage you to do it annually.

So, over the course of this month, I hope you’ll enjoy some of my many stories of fraud, and when I say enjoy I mean I hope they’ll inspire you to put more strict measures in place at your business to prevent fraud.

Remember, if you haven’t found fraud, you’re not looking hard enough.

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The Relationship Between Your Debt and Your Happiness (P.S. It’s Obvious)

In my last post about happiness, I wrote about 4 ways you can be happier and less stressed in order to run your business more effectively:

1. Do Good Deeds

2. Get Exercise

3. Get Hugged

4. Get a Pet

I want to keep on with this idea of happiness and focus even more closely on the things you can do to increase your happiness as it relates to money and finances, both personally and for your business.

It may come as no secret to you that debt makes people unhappy, but you’d be surprised at how little debt it takes to sour relationships, create tension and stress and ruin a business. Therefore, whenever possible, make sure that you and your company are carrying as little debt as possible.

To tell you to spend money paying down debt that your business doesn’t have might seem foolish, but what’s foolish is spending money that your business doesn’t have in the first place!

TIme and again I am brought in to resolve the problems of businesses with inordinate debt and money owed to a wide variety of lenders and creditors. As I look back to see what debt is really in front of us, who’s owed what and at what interest rate, when loans are coming due, etc., I often uncover a similar pattern.

Those who are in debt need not be in debt – or at least not the kind of debt they’re in.

They are in debt because they didn’t take the opportunity to pay down some of their initial debt when they had the chance. Instead, they sought to use their capital for further investment (or unsavory things), thereby driving themselves further and further into debt when paying that debt off in the beginning would have done wonders for the future of their business. That is to say, they would have been able to keep their businesses.

It is true that sometimes the answer to a cash flow problem is a loan, but I have been in numerous situations where any loan would have been throwing more money at a sinking ship.

That is why it’s important not to take loans to supplement loans. This may seem like obvious advice, but you’d be amazed at how often these are the problems I’m dealing with. When given the opportunity to pay the principal down on a loan or to pay off a credit card you’ve been using to finance your business, do it. Don’t think that buying a new piece of fancy equipment for your factory is the perfect way to grow your business faster or that hiring a new employee will solve all of your problems. Pay your debt down and continue to own your business. It will keep you focused by ultimately keeping you less stressed and helping you avoid crises and debt in the future.

Want to be happy at your job? Then keep your business debt free.

Is your business buried under debt or has it been? What did you do about it?

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The Importance of Preparation as Taught by Benjamin Franklin and Alexander Graham Bell

Before anything else, preparation is the key to success.

– Alexander Graham Bell

I’ve recently seen some rather poor planning, and I want to take a moment to emphasize the value of preparation.

The initial preparation-based document of most businesses is the Business Plan. You know, that document that your angel investor, banker, spouse, partner, etc. wanted to see to make sure that you weren’t totally out of your mind when you told them you were going to start a business that did this, that and the other?

The point of that document was, in part, to prepare you for many of the issues that arise over the course of doing business. Do you need special permits or authorization? How much will your operating expenses be the first five years? When do you initially expect to turn a profit? What are your competitors’ barriers to entry or can anyone steal your idea?

See? These are questions of preparation. Despite Mr. Bell’s assertion, answering these questions does not guarantee your success, but it’s certainly a step in the right direction.

Have you found that your business is flagging recently, that there’s a certain stagnation or that things aren’t headed in the direction you’d hoped? Perhaps things are going well, but you’re about to embark on a huge project.

Don’t just flail around grasping at straws and hoping for the best outcome. Do some preparation before you have a crisis and things move too fast for you to adequately prepare. I’ll invoke one of my 10 Ways not to Hire a Guy Like Me: leverage your business plan! That document is probably buried away in saved files – or maybe you put it together before the ubiquity of computers and it’s in your file cabinet, weathered and dusty.

Either way, pull it out!

Now make an effort to leverage it. What did you say you would do if things turned south? What were your contingency plans? Even if you’re not in this state, updating your business plan for posterity and ensuring that there is a plan in place should something happen to you and your ability to move the business forward is important.

Not sure where the business plan is, you don’t have one or it’s not proving helpful? It’s time to rethink your business plan, and use that as a means of preparing yourself to solve your problems before you have a crisis on your hands.

Remember the company that thought it was going to move from Minnesota to Orlando over the weekend? That was not preparation. We went in and got them adequately prepared for their move – and it was successful. In order to be successful yourself, I encourage you to spend more time preparing – before anything else.

Are you ready?

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Radio Interview with Bernie Marcus and Lee Katz on the Michael Hart Show

It’s been a long time coming, but at long last here’s the radio interview I promised you. I was on the Michael Hart show with Bernie Marcus, retired founder of The Home Depot, and here is the audio of that conversation.

As you may notice, the interview is in large part with Bernie Marcus, and it was absolutely my pleasure to get to accompany him. I really enjoyed being a part of the discussion about the government and business as well as how to create more jobs in this country.

Please let me know if you have any thoughts or questions!

Radio Interview with Bernie Marcus & Me