Financial Crime is a $50 Billion Threat: Here’s What Businesses Can Do for Protection in 2019

Here’s a disturbing thought for business owners: A single instance of employee embezzlement is sometimes all it takes to shutter the doors of an otherwise respectable and profitable organization.

Consider the sad example of Church Point Manor, a once-popular bed and breakfast based in Virginia Beach, Virginia. Located inside a historic three story Victorian farmhouse once used as a Confederate hospital, the bed and breakfast was a local institution stretching back more than two decades. The Cellars, Church Point Manor’s restaurant, made regular appearances on lists of the most romantic eateries in the United States.

Despite this, the actions of one employee were enough to help put Church Point Manor out of business.

According to court documents, a Church Manor Point employee embezzled roughly $377,000 from 2014 to 2017 by engaging in simple check fraud. The proprietor gave the employee signed checks to fund the business, and those checks were instead used for personal expenses.

The money was allegedly used to finance vacations, a wedding ring, car and rent payments and other purchases. To cover her tracks, the employee made false entries in the company’s books to make it appear like the embezzled funds were tied to legitimate expenses.

Unfortunately, what happened to Church Point Manor is merely one example of a wider threat — one that disproportionately affects small to mid-sized businesses.

The $50 Billion Threat of Financial Crime

Check fraud, embezzlement and other forms of white collar crime are some of the most significant threats businesses face. According to recent research by the global insurer Hiscox, employee theft costs U.S. businesses a staggering $50 billion annually. Small to mid-sized businesses suffer the most, comprising 68-percent of all losses.

According to the data collected by Hiscox, the most common forms of workplace theft include:

  • Funds or cash theft (34%)
  • Check fraud (22%)
  • Vendor fraud (14%)
  • Credit card fraud (10%)
  • Property/merchandise (4%)
  • Payroll (4%)
  • Loan fraud (1%)

CNBC recently highlighted two such cases affecting smaller firms. Computer Repair Doctor, which has eight locations in Florida, Ohio and South Carolina, was victimized when some of its employees began stealing parts from inventory in order to skim cash.

In the case of LaptopMD, a similar small business, an employee was able to steal money by changing the company Amazon Services account to his personal account. Money that was being charged to customers was then routed into the personal account.

In another, higher-profile case, the Woodruff Arts Center in Atlanta lost nearly $1.5 million after a former employee set up a shell company, then invoiced the Woodruff Arts Center for bogus services over the course of five years. Even this substantial figure pales in comparison to the case of Day Lee Foods, a meat processing firm that lost approximately $100 million after one of its employees engaged in longstanding check fraud, simply writing checks to himself from company accounts and taking out revolving lines of credit to hide the trail.

These incidents all have one thing in common: They could have been avoided with tighter inventory protocols, closer oversight and stronger financial accounting processes.

How to Mitigate the Risks of Financial Crime

As the cases outlined above show, even a single employee with the wrong intentions can do enough damage to close a business down forever. Fortunately, there are some smart protocols businesses can put into place to mitigate these risks, helping protect both a company’s financial health and its reputation.

To help protect against embezzlement and other forms of theft, it’s wise to consider implementing the following steps and processes:

Account oversight. Embezzlement is a crime of opportunity. If strong internal controls are in place, the opportunity for theft may never prevent itself. This means it’s critically important to have strong oversight present for every account and across every layer of an organization.

Daily reconciliation. The reconciliation process allows you to catch any anomalies between internal records and bank records at an early stage. By opting for daily reconciliation, businesses can take maximum advantage of the protection offered by the reconciliation process. If fraud or theft is taking place, it will likely be identified quickly, before consequences become too severe.

Division of duties. As witnessed in the above example of Church Point Manor, it’s dangerous to give one employee too much control over company finances. By dividing duties among multiple people, an internal system of checks and balances is created. For example, a business may choose to have one person open envelopes containing checks, and another person record this information. Or, one person may be designated to purchase items, while a second person records the transactions. This eliminates the risk that payments or transactions may be under reported or misreported.

Third-party solutions. Given the potential consequences, it’s imperative that organizations take strong measures to prevent theft and fraud. Unfortunately, not every business has the in-house expertise or experience to design and maintain the right protocols and processes. By working with a third-party financial protection software provider, companies can help mitigate against these risks.

By following these steps, organizations can establish the kind of powerful protective framework that limits opportunities for theft and fraud and provides early detection should anything appear amiss.

The Takeaway

Embezzlement and other forms of white collar crime cost businesses billions of dollars in annual losses. Because small to mid-sized companies often lack the resources, expertise and formal accounting processes needed to prevent such crimes, they bear the brunt of the risk. For smaller companies with limited resources, such financial risks are often existential in nature.

Working with a third-party financial protection software provider, such as Rynoh, is a smart way for at-risk companies to establish strong safeguards. It’s important, however to choose the right partner. In most cases, this means a solution that offers the following:

  • Seamless integration with popular accounting programs
  • Continuous end to end account auditing
  • Daily reconciliation
  • Transaction monitoring
  • Automated reporting
  • Anti-fraud algorithms

By finding an advanced solution that offers this slate of critical features, businesses can significantly lower the serious risks presented by financial crimes and protect their future viability.