Preventing an “inside job”

March 21, 2012

I recently read an article about a nursery school employee who embezzled more than $150,000 from a private school over a five-year period. The nursery school was a small nonprofit, and the suspect worked there as a trusted bookkeeper for about 30 years. She did this by issuing checks to herself from school accounts for money she was not owed and was able to conceal her actions.

I recently read an article about a nursery school employee who embezzled more than $150,000 from a private school over a five-year period. The nursery school was a small nonprofit, and the suspect worked there as a trusted bookkeeper for about 30 years. She did this by issuing checks to herself from school accounts for money she was not owed and was able to conceal her actions.

I began thinking about how exposed dental labs could be to this type of crime. Small businesses, like most dental labs, are the most vulnerable to occupational fraud and abuse, according to the Association for Certified Fraud Examiners, which reports that small organizations (100 employees or fewer) suffered higher median losses than large organizations (10,000 employees or more). Small businesses’ losses averaged $127,500, based on a CFE survey.

Considering the potential losses, it behooves you to make fraud prevention a priority in your business. Though no one wants to feel they employ unscrupulous people, sometimes temptation or personal financial pressures can push even the hardest-working, most-trusted employee into perpetrating fraud.

Fraud Prevention

1. Employee check: The first step in preventing employee fraud is to hire the right employees. Conduct background checks for people handling inventory and money. Check past employment, criminal convictions, references, education, and certifications. Also, conduct drug screenings because employees often steal from a business to support an addiction. Try to avoid putting employees in situations where they could be tempted to do the wrong thing. Remember, however, to always get the written consent of candidates before doing research because many federal and state laws govern the gathering of such information.

2. Accountability: Have controls in place that are meant to make employees accountable. This protects both you and them. An outside independent accountant can help you develop a system of internal controls and come in to check and validate entries to the accounting system on a routine basis. Knowing that an outsider comes in periodically implies that as a business owner you are serious about accountability and fraud prevention.

3. Checks and balances: You don’t want the same person in the lab placing orders, receiving the goods, and paying the bill (particularly when dealing with precious alloys). Likewise, you don’t want someone who has authority to sign checks balancing the account. Make sure expenditures are approved. For every expense, have a manager or administrator approve it. In a small lab, the owner needs to review expenditures. Check that the expense is valid and that the math is correct.

4. Keep watch: Have security cameras monitor activity in the casting room and storage areas where inventory is kept. People are less likely to commit fraud if they know they are being watched.

5. Conduct surprise audits: Catching an employee off guard could be your best bet in discovering fraud. Have the owner, a key employee such as a department manager, or outside accountant fill the role of auditor. A simple test can be to examine the payment of 100 vendor invoices in detail. Look at the amounts, invoice numbers, to whom payments were made, and when payments were made. Look even deeper into any that look suspicious. There have been cases where an employee creates a phony company, submits invoices to accounting, and has accounting send payment to a P.O. Box. A surprise audit also can uncover duplicate invoice amounts and invoice numbers, both of which can be red flags for possible wrongdoing.

6. Control cash: As a small business owner, make it a policy to personally sign all checks, or require a dual signature. Making two employees responsible reduces the opportunity for one of them to commit fraud. There have been situations where employees have received “kickbacks” from vendors for processing orders for goods and services that may not be needed or at higher-than-usual prices. Make it a point to know your suppliers and lenders and make competitive purchasing a standard policy.

7. Enforce mandatory vacations: Research has shown if employees don’t take vacation, it can be a red flag. They may be afraid to go on vacation because someone is going to find out something is not right. Requiring employees to take time off can aid in preventing some frauds.

It’s difficult enough to operate a profitable dental lab today. Don’t be the victim of an inside job.