Fraud Prevention Tip: Regularly Monitor and Review Monetary Trends

In some ways this tip is similar to the tip about taking all shortages seriously, but I think that this is broader. If you dip into your Quickbooks or whatever software you use for your accounting, you’ll discover that there are hundreds of reports that your system can generate for you from the top view P&L and Balance Sheet to the nitty gritty item detail by customer.

Understanding your company’s KPIs – or Key Performance Indicators – is a great place to start when seeking the trends that matter to you. However, thinking generally about other numbers in your business, and regularly monitoring them, is a very important exercise.

The beauty of this tip is that you can determine how to run the necessary report you need and then have someone in the accounting department run and provide these reports daily, weekly or monthly, depending on the relevance, scope and immediacy of them. Chart the differences over the period of time in question, and you’ll notice a variety of fascinating things.

Let me tell you why at a high-end, couture dress manufacturer in New York, they should have been watching their scrap and the cost per dress of manufacturing.

In the world of couture, the profit per piece is generally quite high, especially at this particular dress manufacturer. What started to happen, though, as we later discovered, was that the production manager was taking the overrun of these $5,000 dresses and selling them to discount operations. As this started to work well, he would buy more materials and then write them off as scrap; to make them into dresses and sell them to discount retailers, though, he still had to run the plant which obviously costs money, too.

Had the CEO been receiving regular reports on the, for instance, scrap rate, then he would have noticed something out of whack much earlier and asked the plant manager to reevaluate his processes. Similarly, tracking manufacturing costs could have uncovered this fraudulent activity. As labor and material costs rose while revenue remained steady the CEO should have thought more carefully about the impact on his profit and why it was happening.

If you are making a widget day in and out and you know that the material is x and the labor is y, you need to watch the trends to make sure that the numbers are staying consistent (or inconsistent in your favor).

This applies to all relevant numbers in your business. Regularly monitor and review monetary trends.

Which trends do you monitor? How frequently?


Fraud Prevention Tip: Don’t Rehire People Who Steal From You – Seriously

My lengthy post on the need to always prosecute those who steal from you included an exploration of those reasons that people fail to prosecute and how not doing so is a larger problem for the business world. Now I’m going to provide you with a very concrete story that I hope highlights why you always prosecute and why you never – ever – rehire people who steal from you.

I was once turning around a company at which a sales manager had a scheme with a customer.

The published sale’s price of this company’s primary widget was $8.50. The salesperson in question would place an order for a particular customer of his, ship the merchandise to the customer and then go to accounts receivable and put through a credit memo for that customer which would net the customer a price below the list price of $8.50. The customer would then slip the salesperson 50% of his savings. That is, the customer would pay $4.50 for the widget, thereby saving a total of $4/widget, half of which ($2) he would give back to the salesperson.

Because something like this can easily slip below the radar in a company with enough customers the financial impact might be minimal; thus, it’s very easy to go undetected for a while. The reason I discovered that this was happening was because the guy got greedy and started doing this with multiple customers. In his hastiness he put the credit through for the wrong company. The accounting department at that company was honest and came to us to disclose this erroneously applied credit. When we researched the credit we discovered what was happening, and the whole scheme unraveled.

As a result, this guy was fired (thank goodness) and never prosecuted (rats).

Apparently, this guy was an excellent salesperson, and even though he was ripping off the company for which he was working, he was simultaneously drumming up a remarkable amount of legit business. After he was fired the company’s sales declined by 25% over the next two years. Unsure of what to do and unable to find a suitable sales force to replace this one guy, the CEO rehired the once-thieving salesman (and as I always say, “Once a thieving salesman, always a thieving salesman”).

When asked why, the CEO said that the salesman had found God, repented for all of his sins and begged forgiveness. Though he never made monetary restitution for his misguided ways, he nonetheless apologized sufficiently enough for the CEO, who rehired him to return the company’s sales to a profitable level.

Lo’ and behold, six months later they (finally) put the salesman in jail because he started stealing again. Don’t make me say the following twice – please.

Do not rehire people who steal from you – ever.

This one is not a tip or a simple recommendation – I’m imploring you.

I believe in second chances in life. We all screw up at one point or another, and I dare say, we all deserve to find forgiveness. Despite that, do not rehire people who steal from you. If you think that you might not be able to keep to this because you’re such a forgiving person, then put it in your company’s bylaws to prohibit you from rehiring thieves despite your wishes otherwise.

Do not rehire people who steal from you. Seriously.