Small Businesses Face More Fraud


CASH-SQUEEZED PRIVATELY HELD companies are facing another threat in this struggling economy: rising employee fraud.

Employee fraud — from check-forgery schemes to petty-cash theft — tends to rise during tough economic times, when workers are feeling financial pressure in their personal lives, experts say. And small companies are especially vulnerable because they often lack stringent internal controls to prevent fraud. Sometimes, managers at affected companies attribute lost funds to lower sales — never even suspecting foul play.

Karin Wilson, president of Fairhope, Ala., bookstore Page and Palette Inc., says she was defrauded by a trusted employee.

"A lot of times a small business will close its doors, and may never know they were defrauded — that the problem wasn't a declining economy, that employees were stealing," says James D. Ratley, president of the Association of Certified Fraud Examiners, an antifraud trade group based in Austin, Texas.

Jeffrey Sklar, a partner at Bellmore, N.Y., accounting firm Sklar, Heyman & Company LLP, says in a tough economy employees may feel pressure to maintain a certain lifestyle, or they may succumb to pressure from family or friends who know they have access to cash at work. In some cases, they may resent a business owner who drives a fancy car when they're struggling to make ends meet.

"Desperate people do desperate things," he says.

Karin Wilson, the co-owner and president of Page and Palette Inc., a bookstore in Fairhope, Ala., says she was burned by a trusted employee. Sales at the family-owned business began to slide in the second half of last year. By the holiday season, money was so tight the store ran out of some books. But it wasn't able to order more because vendors wouldn't extend the store any additional credit. Ms. Wilson, 40 years old, figured the vendors were reacting to the credit crunch.

Then the week before Christmas, she saw a bill for the company's credit-card account. It said the company was months late on its payments. She began examining accounts and soon put together the pieces. Ms. Wilson claims the company's former bookkeeper, who had a personal credit card with the same bank, had used funds from the company's bank account to pay off her personal credit card. And Ms. Wilson says she kept paying her personal bills with company funds even after resigning in October.

Ms. Wilson also alleges that the former employee had written checks to herself instead of paying publishers for book orders. Payments were made to a local golf-club membership and for private-school tuition, Ms. Wilson says. She estimates she lost as much as 20% in potential sales during this past holiday season because she wasn't able to order enough books. In all, she alleges that the employee took about $150,000 over the course of about 2 1/2 years. Ms. Wilson, who co-owns the business with her husband, says she typically would give the company's finances a cursory look but the bookkeeper had access to all the accounts. She claims the worker doctored reports to make it look like vendors' and other bills had been paid.

"I definitely think she realized quickly how trusting we were," she says.

According to the Fairhope Police Department in Baldwin County, Ala., the person was charged with 25 counts of criminal possession of a forged instrument in the second degree. An attorney for the person declined to comment because of the pending litigation.

Ms. Wilson has made fundamental changes to the way she runs her business. The stamp bearing her signature went in the garbage. Bank-account statements arrive at her home, instead of the business. Employees no longer have access to company credit cards — all charges go through Ms. Wilson.

Last spring, Brandon Ansel, who owns a Roly Poly sandwiches and a Biggby Coffee franchise in Jackson Mich., noticed one of the restaurant employees wasn't depositing the money from the cash register daily as he was supposed to do. Instead, he was making deposits every three or four days. Mr. Ansel says when he approached him, the manager would say he ran out of time.

As the economy worsened, the employee took even more days to make the deposits, claims the 30-year-old Mr. Ansel, at one point waiting nine days. He says he suspected the worker was skimming money so he confronted the employee. Mr. Ansel claims the employee admitted that he was having financial problems and intended to pay the money back. He says a family member of the employee ended up paying him $9,000, the amount he claims the employee admitted taking, and Mr. Ansel decided not to press charges.

Mr. Ansel, who declined to disclose the former employee's name, says he's watching the bank account more closely and his accountant is combing over account statements as well. Even so, he feels that as a small-business owner, he's more vulnerable because he doesn't have a lot of systems in place to flag fraud.

Because of the weak economy, Mr. Ansel is considering pay decreases at his two restaurants. "That puts a negative taste in people's mouths," he says, "and I'm afraid they'll feel justified in making bad choices."

Mr. Sklar, the accountant, says business owners should be alert to employees who seem to live a lifestyle that's beyond their means. Employees who guard access to accounting software or never take a vacation also should raise suspicion. Business owners should review every canceled check and look at the signature on the back, he adds, and they should review bank statements each month and check for unusual transfers.

Once a business owner discovers any alleged fraud, he or she should keep quiet while building a team of people to help: ideally, an accountant and lawyer. Most employees are ashamed of what they've done and will agree to strike a deal to avoid prosecution, Mr. Sklar says.

If a business owner doesn't tread carefully, he or she could lose the chance to recoup the lost money. A few months ago, the director of operations at New York promotions company ePromos Promotional Products Inc. noticed that paychecks had been deposited at unusual times into employees' bank accounts. The operations director approached the director of human resources, a recently-hired employee who oversaw payroll systems and direct deposit. Jason Robbins, ePromos's president and chief executive, claims the worker admitted to skimming some money from the company and said some of the irregular checks were a mistake. Mr. Robbins says the person left the office that afternoon and never came back.

Mr. Robbins says he called the police and the employee hasn't been tracked down yet. A New York City Police Department official wasn't immediately available to comment on the case.

Mr. Robbins says he and the director of operations combed through bank and payroll records and he alleges that they uncovered at least $10,000 in missing funds. He claims that when workers quit or were terminated, the HR director left their payroll accounts open and diverted their pay to himself.

John Egan, vice president of operations at Balance Point Payroll, the Glen Rock, N.J., payroll firm used by ePromos, says the former employee called with unusual changes to the company's payroll, including frequent changes to employees' direct-deposit information.

Today, Mr. Robbins pores over payroll reports himself to check for irregularities. "We're a $25 million company — we can't afford fancy stuff" to detect fraud, he says. "As you grow you have to delegate. He seemed super trustworthy."