By Jeff Arnold
Southwest Times-Record

FORT SMITH — While executives who steal from their employers — like former Walmart executive Tom Coughlin — capture headlines, small businesses are hit the hardest by employee theft, according to the Association of Certified Fraud Examiners.

In its latest “Report to the Nation on Occupational Fraud and Abuse,” the ACFE reported a greater percentage of small businesses — defined as having fewer than 100 employees — are victimized by employee theft and suffer higher median losses than larger businesses.

Dave Robertson, director of the Family Enterprise Center at the University of Arkansas at Fort Smith, said a significant issue facing small businesses is the inability to adequately segregate duties.

“They don’t have enough resources to staff where you can segregate duties and have checks and balances,” Robertson said. Before he came to the FEC in April, Robertson spent about 10 of his 30 years in the accounting industry working as a certified fraud examiner.

Employee fraud at large companies is caught earlier, limiting the losses, in part thanks to legislation passed in response to the Enron, Worldcom and other large corporate scandals, Robertson said.

The legislation forces larger corporations to more frequently test internal controls that are designed to prevent and/or limit employee fraud. But Robertson said too often in a small business, the person reconciling the books might be the same person signing the checks for billing and maybe even handling payroll.

The FEC recently hosted a workshop at UAFS for family businesses to provide information on employee theft and strategies to combat it in small business with limited resources.

Sue Talkington, a partner at Beall Barclay & Co. accounting firm, was a speaker at the workshop.

Even with internal checks and balances in place, Talkington said, small-business owners cannot rest; the controls must be “ever evolving” and under “constant review.”

The controls must remain under review because circumstances change, such as the downward turn in the stock market, and that could provide a motivation for internal theft, Talkington said.

Robertson said motivation or justification is one-third of the “fraud triangle,” which describes a convergence of conditions that increase the likelihood of fraud and theft; the remaining two-thirds of the triangle are economic need and opportunity.

While small-business owners have no control over economic need or an employee’s ability to rationalize theft, they can limit opportunities with proper checks and balances, Robertson said.

In addition to segregation of duties, some of the anti-fraud controls business owners in the ACFE survey found most effective in minimizing loss include:

· Surprise audits.

· Job rotation and mandatory vacations.

· Tip hot lines.

· Employee support programs.

· Fraud training for managers/executives.

Talkington said employers also need to be conscious of red flags, such as employees living far beyond their means.

She said that even with ideal controls in place a business can still be victimized by employee theft or fraud, but should help minimize the loss.