Using Internal Controls to Reduce Employee Theft in Small Businesses

ABSTRACT: UTILISATION DE SYSTEMES DE CONTROLE INTERNE POUR LA REDUCTION DES VOLS COMMIS PAR LES EMPLOYES DE PETITES ENTREPRISES Les renseignements regroupes grace a huit partenaires d'entreprises decomptabilite (quatre "Big Eight" et quatre regionales), ont permis aux auteurs de cet article d'identifier quarantedeux procedures essentielles pour le controle, par les proprietaires de petites entreprises, des vols commis par leurs employes. La plupart de ces mesures de controle (vingt et une) ont trait it l'argent liquide, l'avoir le plus disponible, et le plus susceptible d'etre vols. Parmi les autres systemes, deux a quatre sont concernes soit par les salaires, soit par les investissements, les inventaires, ou notes et comptes generaux de credit ou de debit. Employee theft is one of the most serious problems faced by small businesses in the United States today. According to the U.S. Chamber of Commerce, $40 billion is stolen annually from U.S. businesses, ten times the cost of the nation's street crime. ' In addition, estimates suggest that almost $200 billion worth of employee time is stolen annually and that losses due to employee theft are increasing at a rate of 15 percent per year. The effects of employee theft on smaller firms can be devastating. Because of the competitive nature of the markets they serve and the financial constraints they face, small businesses can ill afford to ignore this problem. According to one estimate, for example, almost one-third of all business failures in the United States are due to internal theft. Interestingly, most small business owners are not sensitive enough to the threat posed by this form of theft, and tend to regard it as a cost of doing business. Internal issues in general, and employee theft in particular, tend to be ignored unless, and until, severe problems arise. THE IMPORTANCE OF INTERNAL CONTROLS The implementation of appropriate internal control procedures is a fundamental and important step in reducing employee theft. To be effective, the controls used and the way they are implemented must reflect an understanding of who is likely to steal from the company and how he or she might do it. Additionally, internal control procedures must be used in a consistent manner, and they should not differentiate among owners, managers, partners, officers, relatives, or friends. This article focuses on the use of internal controls in small firms to reduce employee theft. It takes into account that, in dealing with the theft problem, smaller firms must come to grips with severe constraints that larger firms do not encounter. Additionally, the underlying organizational issues that influence employee attitudes toward theft are discussed. ORGANIZATIONAL CLIMATE AND CONTROL OF THEFT Effective internal control begins with the creation of a climate within the organization that supports and reinforces such values as honesty and integrity. Small business owners should begin by communicating clearly with their employees so that everyone understands what constitutes theft and the consequences for those committing the offense. Additionally, it is essential for all members of the management team to adhere closely to these values. If managers deviate from the values even slightly, the employees may conclude that these values are mere window dressing. The creation of an appropriate climate in the firm is thus a necessary precondition for the effective implementation of internal control procedures. USING INTERNAL CONTROLS Once these basic questions and issues have been addressed, it is important to focus attention on the specific controls needed to minimize the incidence of employee theft. Careless or inadequate internal controls provide an attractive inducement to would-be thieves, and they suggest that management is not serious about the problem. Good internal controls, on the other hand, can help to increase productivity by minimizing waste, unintentional errors, and fraud. …