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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | MAY 29, 2001 SMART ANSWERS By Karen E. Klein When Good Workers Go Bad The smart entrepreneur guards against the scams that tempt unscrupulous employees, from petty theft to soliciting off-the-books jobs
U.S. Department of Commerce statistics show that 60% of new businesses fail in their first five years. One-third of those failures, the DOC says, can be traced directly to fraud -- from outright stealing of cash or supplies to embezzlement, pilfering, and theft of intellectual property. The Association of Certified Fraud Examiners (cfenet.com), based in Austin, Tex., reports that fraud and abuse costs U.S. organizations more than $400 billion annually, and asserts that the most costly abuses occur in small companies. "It's horribly staggering, and small businesses are hurt the worst. It's a killer for them," says Charles Rettstadt, president of Research North, a private detective agency based in Petoskey, Mich., that deals with business fraud. Small companies are 100 times more likely to experience employee fraud than their larger counterparts because of the more relaxed atmosphere and lack of internal controls in entrepreneurial companies, he says. REPUTATION ON THE LINE. Time-clock theft or price undercutting, that plagues small service providers like Alonzy is particularly insidious, experts say, because it is difficult to stop and stops many micro-enterprises from growing. "I have an ungodly amount of business," Alonzy says. "I get enough calls and business to keep three handymen busy." Alonzy fears that economic reality would not allow him to pay workers enough to discourage pilfering and client-stealing. "Let's say my usual rate is $40 an hour. If I paid an employee $20 an hour, it would cost me about $28 an hour to cover overhead costs, salary, and benefits. If the handyman wanted to, he could do part of the job on the clock, then offer to come back later and finish it off the books for $25 an hour in cash, and ask my customers to call him directly the next time around," Alonzy says. "It hurts you, your company, and your company's good name." This kind of under-the-table transaction also hurts other employees, the customer whose off-the-clock repair is not covered by warranty, and, ultimately, society as a whole, says John Walburn, who runs a grassroots organization called Employee Theft Anonymous, based in Douglas County, Kan. "A repairman who's not reporting his full revenue to the company is contributing to lowered cash flow, lack of employees' raises, potential bankruptcy, and loss of jobs," Walburn says. "If he's not reporting that cash as income, he's paying no taxes on it, and we as a society are losing out on funds we need to generate public education, health, public works, and everything else that runs a democracy." Given the seriousness and pervasive nature of time-clock fraud, how can company owners protect themselves -- assuming they can't afford to have a supervisor looking over the shoulders of off-site workers? Although it is difficult to prevent entirely, employee fraud can be reduced, experts say. Here are some of their suggestions: -- Establish internal controls to reduce the possibility of employees skimming. Have an in-house employee take calls, book jobs, and do the billing, rather than relying on service technicians to collect the cash. Says Rettstadt: "In this kind of service business, you don't want one employee to handle the transaction from cradle to grave." -- Be meticulous about doing reference and background checks on new employees (including credit checks on those who will be handling money). Watch for unexplained changes in employees' lifestyles, and monitor employees who fall into financial difficulty. Don't assume that long-time and trusted employees are immune from temptation -- experts say they are sometimes more likely to steal because they have less oversight. -- Monitor employees' time and your own inventory closely. Does one employee consistently take three hours on jobs estimated at 45 minutes? Are unexplained parts missing that may be used on unrecorded jobs? -- Let your employees know that you keep in touch with your customers. Calling for feedback after a service call is important, not only to uncover fraud your clients may not know about, but also for customer-service purposes, says Marsha Bertrand, author of Fraud! How to Protect Yourself from Schemes, Scams, and Swindles. -- Run your own business dealings honorably and set a good example. "If management is doing things that are underhanded or not quite legal, the employees will, too," Bertrand says. Set a written code of ethics for the company, and give your employees incentives for following it -- and consequences if they ignore it. -- Create a positive workplace and pay your employees fairly. Workers sometimes justify stealing because they feel they're not getting a good deal from their employers. -- Give employees a safe way to report fraud, one that removes any fear of retribution. Doug Rector, a Renton (Wash.)-based loss-prevention consultant, advocates an employee-theft "hotline" for outfits both large and small. "Other employees don't want to be associated with someone who steals, but they are more comfortable going to an outside third party with the information and reporting it anonymously," he says, adding: "Employers can offer a reward as an incentive." Walburn's group has a Web site, www.etheft.com, that takes fraud tips by e-mail or telephone (800-45-THEFT), and says he turns over more than 100 anonymous reports of fraud to employers every month. -- If you get reports that a particular employee is pilfering, attempt to verify them, and consult your business attorney and/or the local authorities. Be careful about making unfounded accusations of criminal behavior. But if you can prove that fraud has been committed, don't just let a dishonest employee go, Rettstadt says. "You want to hold this person out so he or she doesn't go to the next business down the road and do the same damn thing," he says. -- Educate your employees -- and your customers -- about the problems that accepting off-the-books jobs cause for you and for society at large. "There are a whole lot of reasons for them not to do it, even if it's a little cheaper, but they may not see that big picture unless you point it out," Bertrand says. "Saving $5 an hour isn't worth it in the long run."  Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.  | | |
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