Owners and managers of small businesses and non-profits never have enough time to get everything done. Something always gets put on the back burner and over time others in the organization begin to realize that the owner never checks on process A or inventories of X. That realization may be the last part of the Fraud Triangle falling into place.
Recall that the Fraud Triangle (https://raiderfraudconsulting.com/lost-in-the-fraud-triangle/) identifies the components needed to make a fraudulent crime likely to occur. Pressure, opportunity and rationalization are the sides of the Fraud Triangle. When the owner never reviews some aspect of operations, especially financial, this allows the opportunity for a person to commit fraud. If that person is already under financial pressure, either at work or at home, and they can rationalize why he or she deserves the extra money then the stage is set for embezzlement or theft.
Checking on financial operations can be tedious and time-consuming. This form of “internal control” is often relegated to the accountant or bookkeeper and the owner assumes that no news is good news. In reality no news is just no news. There may be a problem that the bookkeeper thinks is just temporary or that trusted long time employee may be paying for their new car with your cash flow.
This is not an issue just for small businesses or non-profit organizations. Even multi-billion dollar corporations can get a false sense of security and allow basic internal controls to lapse. In one actual case a large corporation (I will call it Bigco) was losing several hundred thousand dollars a year in fraud losses that could have been discovered and stopped immediately if one manager had spot checked some receipts before paying them.
Bigco was a distributor with a large fleet of delivery trucks. These trucks operated on diesel fuel and drivers would re-fuel the trucks as needed using a card that each one was issued. Years after this process was started one person on Bigco’s finance team looked at one of these fuel receipts and noted that the fuel purchased was unleaded gasoline. This individual brought that to the attention of a manager who verified that none of the Bigco’s vehicles used anything except diesel fuel. A subsequent audit found that in one year over $250,000 of unleaded gasoline had been purchased by drivers using their company issued fuel cards. Bigco had been buying gas for the personal vehicles of its drivers for years!
Clearly this issue was a case of managerial carelessness in thinking through the original idea and in following through with internal controls. From the beginning drivers had never been given instructions about using these fuel cards. They could honestly claim that they were never told that they these cards were not for personal use. Or that personal use would result in the improper charges being deducted from the driver’s next paycheck. Or that multiple incidents of improper use may result in termination of employment.
If a manager had just spot checked a few receipts each month before approving payment this issue may have been identified years before it was. If a policy or procedure had been created for the use of these cards before they were handed out to the drivers there may not have been any abuse. If every driver had been given a short training session on using the cards before they had been issued it may never have become an issue.
The moral is that tedious or time-consuming, internal controls exist for a reason. There are ways to design them so that they do not interfere with sales or operations too much. Without controls owners and managers may think they are directing the organization but in reality each employee is moving in a different direction.
If your company has been a victim of fraud let me know if you are willing to discuss it with me. It would be helpful to other entrepreneurs to hear about real life examples of fraud, loss and recovery.