I was having dinner at Houston’s with a friend the other night and the topic of fraud came up. He asked, “You’ve got CFO’s, controllers, all sorts of staff, auditors and regulators…how does this stuff even happen?” I said that fraud in a situation like with all those people is pretty rare. In those cases, you’re apt to have a pretty strong “Control environment”, separation of duties, cross training, dual control, that sort of thing. It would be difficult for someone to steal in a situation like that. Don’t get me wrong, fraud is a serious thing and a well-designed and well-staffed financial accounting function is critical to keeping things in check. But these are publicly traded companies with serious resources and legal requirements that compel them to create these systems.
But it struck me that I should write about the risk as I see it in the small business environment. I’m not going to discuss the statistics or behaviors to watch for; there is plenty of good information on that. Just click this link to see an article by Jan Norman of the Orange County Register on the subject.
But, for the small business owner, unfortunately the risk comes from trust.
The typical scenario is a small business owner who is working his fingers to the bone and finally finds someone who can handle the back office tasks and accounting. The person becomes a fixture in the business and receives almost total reliance from the boss. Usually what you see is a single person in charge of the administration and accounting with almost unlimited access to the company’s cash and assets. Often this situation is accompanied by what I call “Title Blur”, a title given to someone who is clearly unqualified for the role as a reward for being so indispensible. Trust and the shame of violating that trust, are the only controls the owner has to protect against fraud. And once you have this situation, you are now at risk.
You’ve probably heard it said in one way or another that reason doesn’t stand a chance in the face of emotion. Trust falls into the reason category and it can go right out the window for a whole host of emotional reactions. Greed, envy, personal tragedy, mental illness, you name it, can all stack up pretty high and make “trust” seem like a silly little annoying thing. I don’t know how many embezzlers set out to steal from the first day on the job, but life has a curious way of throwing emotional changes and events at us over time. And at some point, the trust will be tested. Maybe the thought occurs to a person, but then is immediately rejected as wrong because of good character and values. Or, maybe not.
One event that I often site in my accounting classes occurred in Orange County in 2009. The trusted employee embezzled $577,000. She’s in jail now, and the owner will never get that money back. Imagine what that does to your sense of trust. If you’re a business owner in this situation, don’t leave this door open. It’s just not a good idea. If it happens to you just one time, it could wipe you out.
Obviously, being a B2B CFO® I believe we can help you if you’re in this situation in the following ways:
• Part of your decision to hire the person was probably cost related. The market rates for accountants with the skill level you really needed was just too high. Since B2B CFO® provides these skills on a part time CFO basis you now have access to the knowledge and resources you need on an affordable basis.
• There are controls that can be put in place in these situations and B2B CFO®’s have the knowledge and experience to do this.
• An on-going consistent relationship with a B2B CFO® adds a level of oversight to the finance and accounting function. We know what to watch for and just the fact that staff is being overseen helps to keep people in check.
Trust in others is something that we naturally desire. It is critical for things to work properly and there is a great sense of satisfaction in a mutually trusting and productive relationship. But it is also a natural desire for humans to be safe. So by putting the proper boundaries and controls in place, we can have the safety we want and need and also be able to enjoy the full value of a trusted relationship.