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Trust, but Verify—Don’t Let This Happen to You!

Trust, but Verify—Don’t Let This Happen to You!

Trust, but Verify—Don’t Let This Happen to You!
January 30
13:36 2017

Risk Management

Russian adage applies to office security

As a boy growing up in the early 1960s, I remember the nagging fear everyone had of what a nuclear war would mean and how close the United States and Russia had come during the Cuban missile crisis. In fact, I knew a man who was a pilot of a B-1 bomber and claimed he and his crew were flying to Russia with live nukes in their bomb bay and were prepared to drop them if the Russians didn’t remove the missiles from Cuba. Fortunately, they were told to return to base halfway to the drop.

The specter of Russia would raise its head once again in the 1980s, when President Ronald Reagan used the quote “Trust, but verify,” a Russian adage that he would repeat during arms control negotiations with Russian president Mikhail Gorbachev. Reagan learned how to speak the phrase in the Russian language and used it frequently as he and Gorbachev worked to prevent the threat of mutually assured destruction if the two superpowers failed to get along. Twenty-odd years after we were hiding under our desks, fear had been replaced with “trust, but verify.”

This is a phrase business owners need to keep in mind when dealing with their employees, especially those charged with handling finances. It’s also advice we need to pass on to our clients so they can protect themselves from employee theft.

Too many business owners are so busy just trying to keep the doors open and make payroll that they don’t take the time to work on their business.  Many started their businesses from scratch, relying on a trusted group of employees and never thinking they needed more robust controls, similar to what larger companies have in place. That’s what happened at Connecticut Stone, a family-owned business with 150 employees, where the owners discovered they were victims of a large-scale embezzlement scheme initiated by a trusted employee. This employee changed existing entries and created false transactions in the company’s accounting ledgers. Luckily, another employee saw that something didn’t seem right and informed the owners. After hours of examining and reconstructing records, it was evident who the person was, how it was done, and for how long it had been going on. It’s hard enough to run a business and take care of your employees and customers without having a trusted employee steal from you.

The owners were devastated to learn just how extensively this employee violated their trust. They discovered that almost $2 million had been misdirected out of much-needed funds to run the business, by someone they completely trusted, right under their noses.

Tyra Dellacrose, the granddaughter of the founder, Leo Dellacrose, and vice president of Connecticut Stone, along with her co-workers, went on the offensive and assisted law enforcement in the investigation. Their efforts resulted in federal prosecution and sentencing of the suspect. She told her story recently to the Family Business Alliance, a West Michigan group of which I am a member. You couldn’t help noticing the pain this had inflicted on her and her family. Since this event happened, Tyra’s made it her mission to speak to as many business leaders as her busy schedule will allow, making sure this doesn’t happen to them.

How does this happen? Recently the National White Collar Crime Center estimated global losses due to employee theft at about $3.7 trillion. Many corporate security experts say that as many as 25% to 40% of all employees steal from their employers. They claim that employee theft accounts for approximately 30% to 50% of all business failures.

Here are some warning signs you should alert your clients to look for:

  • An employee who refuses to take vacation time (often they are afraid that the theft will be detected while they are absent);
  • An employee who continually works overtime;
  • An employee who wants to take work home;
  • Excessive personal spending, such as a new car or trips, by an employee whose income cannot support this kind of spending;
  • Petty cash disappearing;
  • Extravagant expenses during employee travel;
  • Employees with personal vendor relationships (watch out for employees who often lunch with vendors, or who are related to hired contractors); and
  • Depletion of office supplies at an unusually high rate.

Knowing the signs of employee theft will not completely prevent offenses; an employer also must be alerted to take steps such as:

  • Deposit funds daily and reconcile monthly. Loose cash is too tempting, and reconciling the bank statement each month helps catch any irregularities early. Keep track of all petty cash. Money in a cash drawer also can be too attractive to some employees. Require that all petty cash transactions have a petty cash slip or log to support them, and require two signatures on petty cash refill checks.
  • Give employees separate financial duties, using a system of checks and balances. For example, the employee who writes the checks should not be the employee who signs the checks or reconciles the bank statements.
  • Manage by walking around: Let employees know that management is keeping an eye on what goes on in the office. Don’t search employee lockers or personal items; just be alert to changes or unusual activity.
  • Make sure that appropriate paperwork supports employee travel.

Having honest and conscientious employees can go a long way toward minimizing or avoiding fraud inside a client company. Encourage your clients to start today to create an anti-fraud culture in their business by:

  • Having and promoting a fraud hotline, an anonymous and confidential whistleblower reporting service for potential fraud, ethical issues and other concerns. Tips are the most common method of detection, yet less than 20% of businesses have a system in place.
  • Conducting a thorough background check on prospective employees. Employers can search public records to look for bankruptcies and criminal records without permission from the job applicant.
  • Conducting new employee orientation and code of conduct training. A code of conduct sets standards and establishes expectations for employee behavior in the workplace.
  • Meeting with the leadership team to discuss controls so that everyone is on the same page.

As a risk advisor, encourage your clients to consider the impact that employee theft can have on their business. Advise them to have appropriate controls in place and to purchase adequate insurance coverage in case a theft should occur. Show them what clues to look for if they sense that something seems to be out of place; for example, an employee who refuses to take a vacation or who pursues a lifestyle that doesn’t fit that person’s pay range. Advise clients to keep their ears open for any talk from staff members about possible thefts that may be going on. Finally, suggest that clients take the advice of our 40th president, Ronald Reagan, to “Trust, but verify.”

The author

Randy Boss is a Certified Risk Architect at Ottawa Kent in Jenison, Michigan. As a Risk Architect, he designs, builds and implements risk management and insurance plans for middle market companies in the areas of human resources, property/casualty and benefits. He has 39 years of experience and has been at Ottawa Kent for 34 years. He is the co-founder of OSHAlogs.com, an OSHA compliance and injury management platform. Randy can be reached atrboss@ottawakent.com

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Ken Phillips

Ken Phillips

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