Ask the expert

by Gregg M. Steinberg

While large-scale business fraud and breaches of business ethics seem to dominate the front pages of newspapers and the 11 o’clock news, fraud can, touch the world of almost any business.

Employee fraud costs businesses $400 billion in annual losses, and 75 percent of that goes undetected.

Fraud occurs because most companies don’t have the ability to track what is going on. They don’t have the right internal controls, and they don’t understand the key matrices within their business. Many companies are constantly shocked by the fact that while they think little things are walking out the back door, big things are running out the front door.

An example is a plumbing or electrical subcontractor with numerous crews on various job sites. If management does not believe that plumbing supplies, electrical fixtures, wire, piping and small tools are disappearing and that employees are moonlighting on the side, they are under a false perception. Not having the ability to track what inventory is in the field each day and verify its whereabouts creates an opportunity for fraud.

IPA Business Today magazine readers asked Steinberg about how to prevent fraud and implementing an ethical policy.

Do business owners take theft personally?
While business owners do take theft personally, most do not understand or believe the extent to which theft and fraud take place within their business. As such, most business owners do not truly understand that fraud has a major drain on their profitability. After all, it may just be small tools that disappear from a construction company or various types of inventory from auto repair and mechanical shops, or it could be items that walk out of dry and cold storage for food and beverage operations.

For most small businesses, the cost of materials is a key component that can dictate a profitable or losing year. Just a small amount, such as $100 of potential fraud per day, costs the company $25,000 per year in lost bottom-line profit.

Does a corporate ethics policy make a difference?
While an ethics policy may have a short-term impact, it really comes down to corporate culture and the ability to track exactly what is taking place each day. It comes down to meetings with employees. It comes down to management demonstrating leadership relative to ethics and morals that exist within the company. It comes down to management putting systems and controls in place so the employees know they are being watched on a pro-active basis.

It means creating incentives for employees to act in a way that is beneficial to themselves and the team as a whole, and letting them know that they individually can enhance profit, cash flow and quality.

Corporate culture will dictate whether or not there may be one bad apple in the barrel or whether fraud is rampant. In either case, an organization with tracking systems in place will be able to determine whether there is fraud at any level. The system must proactively track what is going on daily in key potential fraud areas within the company.

What can small business owners and managers do to prevent fraud?
One way to prevent fraud is to provide appropriate incentives and compensation plans.

A lot of companies compensate only on flat salary types of systems. However, if they compensate based on individual performance and how employees work with peers and the company as a whole, the behavior that is expected will be promoted. It engenders a teamwork spirit throughout the entire organization, which causes everyone to watch each other.

What else might be done?
The key to stopping fraud from occurring is to have some form of proactive, not reactive, deterrence in place. Always measure the company’s key matrices. Identify clearly within the organization what their hot points are, what key items make them successful and what the key trends are. If the trends get out of line, management can clearly understand that some type of fraud or theft is possible.

One of the easiest ways to identify losses is in the bottom line, not only in terms of profitability but also in terms of additional cash flow in the business. Ultimately that leads to higher morale within the company, less stress and a much happier enterprise overall.

It really comes down to how you measure success. It is measured by a company being profitable in business and employees being prosperous in life.