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Tips for tackling temptationInternal controls can be hard if staff is slim, but execs can take steps to protect themselves

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Making sure no one is in a position to steal from your company or organization can be particularly difficult when the enterprise is small, say certified public accounts.

The foremost way of ensuring employees or partners aren't taking for themselves is to divide job duties among multiple people — which can be next to impossible if there are only a handful of employees in the first place.

But with several recent cases of alleged theft reported in the midstate highlighting the issue, particularly at smaller organizations, now is a good time for business owners and upper-level executives to look at their own companies and determine if the right protections are in place. Here is what several local experts recommend:

Potential red flags

• Employees who never take time off is an important red flag to watch out for, said David Coffman, president of Dauphin County-based Business Valuations & Strategies PC. Coffman specializes in business valuations and is also certified in financial forensics. His eyes can be the first new ones on the books at a firm in a while, and he said he has discovered some instances of embezzlement.

Resisting taking time off could be a sign someone doesn't want anyone to fill in for them and discover impropriety, In many cases, if embezzlement is occurring, it can go on for many years, he said.

The idea of trust needs to go out the window to a certain extent to help prevent this, he said. Only people who are trusted can get away with stealing from the business. It's OK to trust but also to verify, Coffman said.

"If you didn't trust them, you'd be checking up on them," Coffman said.

• Employee lifestyle changes are another potential red flag, said Lisa A. Myers, partner with Cumberland County-based Boyer & Ritter Certified Public Accountants & Consultants. These can include more extravagant living or even medical problems.

Financial pressures won't make someone steal, but it's something to be aware of, she said.

Myers is a certified fraud examiner whose work in the specialty grew from one case that came up by chance several years ago. In one of her cases, an employee was using a company credit card for medications because his wife was sick. In another, nursing home expenses were the motivation to steal, she said. Add not getting a raise for a few years, and even employees who are thought of very highly can be pulled into doing something wrong.

• The down economy has made the potential for theft even greater because layoffs at many companies have taken away the internal control of having multiple employees performing financial duties.

The one person who is left might be doing the work of five, and he or she might think the efforts deserve a little extra money, Myers said.

"Not that it's right, but you can see why it happens," Myers said.

Actions to consider

• An owner of a small business might be more oriented toward the operations side of the organization, letting someone else handle the financials, Coffman said. The owner of a plumbing business, for example, probably started the enterprise because he's a plumber, not an accountant.

But in lieu of having duties divided among multiple people, it often has to fall to the owner to review financial records and do some bookkeeping to make sure everything balances out, he said.

If nothing else, a person who might be tempted to steal knows someone is checking in, and that acts as a deterrent, Coffman said.

• An owner watching out for impropriety needs to understand the financials to a certain degree and understand the specific business he or she is in, Myers said.

For example, belonging to a trade association and using its resources can help an owner determine whether the dollar amount of inventory listed on a financial statement makes sense against industry norms or the number of vehicles actually on the lot. Another factor to watch is what the gross profit margin of a business is relative to industry norms.

• At the very least, whoever oversees a company's finances should be able to close out the previous month's books and generate financial statements within 10 days of that month's ending, Myers said.

If the person cannot, it could mean he or she is hiding something or the operations aren't properly staffed. Either way, it needs to be addressed for the good of the company, Myers said.

• Positive pay is a tactic that is becoming more popular, said Eric Wright, shareholder in charge of technology advisory services for Allegheny County-based Schneider Downs & Co. Inc. Wright also is chairman of the Pennsylvania Institute of Certified Public Accountants' Information Technology Assurance Committee.

A lot of Wright's firms' clients have implemented positive pay, which involves a company electronically submitting a list of all authorized checks to its bank. If a check comes in to be cashed and isn't on the list, the money does not leave the firm's account, Wright said.

Of course, it only works if the person cutting checks isn't the same person submitting the list to the bank, Wright said. This provides a way for an owner, for example, to periodically look over a comprehensive list of all payments before personally submitting the list of authorized transactions or having someone other than the person who makes payments submit the list.

• Audit trail functions are something business owners should make sure are activated on accounting software, Wright said. That will produce a list of changes made to files such as the names or accounts where payments to vendors are disbursed.

The books still show that a certain company was paid, but embezzlers could have changed the details of where the money actually goes and given it to themselves, Wright said. An audit trail can help catch these instances if an owner periodically reviews the changes.

Having proper controls in place in a business is especially important when it comes to money. Nobody knows better if they aren't in place than the numbers people, Wright said.

• For a small business, building in ways to detect fraud can be less costly than preventing it, said James A. Krimmel, associate professor of accounting at Messiah College and partner with Cumberland County-based Hamilton & Musser PC. Prevention often includes having more staff and dividing duties among them, said Krimmel, who is also a certified fraud examiner and specializes in helping firms develop and implement internal controls.

At the very least, the duties of authorizing payments, having custody of money and bookkeeping all should be separated. If two of them are shared, a fraud can occur, Krimmel said.

• Generally, educating all employees is a good way to watch for fraud, he said.

The most important mindset to get over is the idea of "it can't happen here." Encourage employees to anonymously report odd behavior.

More than 40 percent of frauds are uncovered by anonymous tips, he said.

• Implementing criminal background checks and credit histories is another important tool. First, someone who can't handle their own finances is generally not someone you want managing your company's money, Krimmel said. A credit check can uncover debt problems, which can be a factor in someone committing fraud.

All instances of fraud require pressure, opportunity and rationalization to occur, Krimmel said.

Debt can be the pressure. If an employee then gets the opportunity to scam the business through improper controls, all that's needed is a rationale for doing so, Krimmel said.

Most people need to make themselves think it's OK, such as rationalizing that the money is deserved because the employee passed over for a raise, he said.

Take just one of the three factors away, and fraud won't occur, Krimmel said.

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