Protecting Yourself From Internal Theft It's not just customers who might be trying to steal you blind. Find out how to guard against unscrupulous employees.

It's every business owner's worst nightmare: Spend yearsof hard work building a business, only to discover an internaltheft puts the business in jeopardy.

"The best way to prevent someone from robbing you blind isnot to hire them in the first place," says Gary Zeune, founderof The Pros & The Cons in Columbus, Ohio, believed to be theonly speakers network in the United States for white-collarcriminals.

To screen out the bad apples, Zeune recommends doing a creditcheck on all job applicants. "People with financial problemsare more likely to steal," says Zeune. "So are peoplewith drug, alcohol, and gambling problems."

The law requires employers to make a clear and conspicuousdisclosure to an employee or job candidate that a consumer creditcheck will be conducted. Informing job applicants upfront of thecheck is also an effective screening technique.

"Half the people who see that (notice) hand the applicationright back," says Zeune, a CPA and fraud expert who's beenteaching accounting for more than fifteen years.

Even if you screen your employees, however, it's noguarantee against being ripped off. Zeune says there are threethings needed for an employee to steal: need, opportunity andrationalization. This is known as the "triangle offraud."

And employees who steal often feel exploited or underpaid. Zeuneadds, "They think, 'They're paying me ten dollars anhour, and they're making seventy off me.' It's a greatjustification."

To reduce negative feelings, Zeune recommends owners find a wayto make the employee's interests align with the businessowner's. For Zeune, that means offering his assistant (his onlyemployee) $20 an hour and five percent of net profits. "Thatway, I know she has my interests in mind, because her interests arethe same," he says.

Business owners should also make sure there are strong internalcontrols in place to protect the money. The same person should nothandle incoming and outgoing funds. Zeune suggests having yourbusiness bank statement sent to you at home so you can review thetransactions. Look for unusual transactions, but also be on thealert for missing expenses (like not paying sales tax). No matterhow busy you are, review and sign every check that goes out.

In an all-too-common scenario, a second-generation family cardealership in upstate New York lost almost three-quarters of amillion dollars when their comptroller embezzled funds set aside topay state sales tax. The owner's son, who was willing to sharehis story without identifying his father, said his dad doesn'tlike to talk about what happened because it was so painful.

"They trusted this guy, thought he was nice," said theson. "My dad never did a background check on him. He used tocome over to our house on holidays." A background check mighthave revealed the employee's cocaine possession charge andsuspicious business affiliations in his past.

"[The comptroller] never took a vacation," recalledthe son. "He also opened all the mail, making it easier tocover his tracks." The embezzlement was discovered oneSaturday when the father stopped in to the office and opened aletter from the state tax authority that began "This is yourthird notice."

It was a challenge to convince the state that the business ownerhimself had not been involved in the fraud. In the end, the crookedcomptroller was sent to jail for seven years, but the owner neverrecovered any of the lost cash. He had to mortgage his property topay the back taxes, and the business closed just two years later,destroyed by the burden of such a big debt.

"That theft affected my entire family," said the son."They all relied on the business."

While employees commit fraud and theft, business owners, too,are not immune to crime. Larry (not his real name) owned a sportinggoods store in Utah. He embezzled $70,000 by making false creditcard charges after he discovered how easy it was to fake a creditcard processing error. Larry, who had to pay back the money as wellas spend time in jail, said in an interview, "Most of us tryto be honest and fair, and don't want to hurt anyone. Butcircumstances dictate our actions."

Like many small-business owners, Larry had cash flow problems.He began using his merchant account (which processed credit cardtransactions) to provide himself with short-term loans, which hewould charge and then refund. After a few months, Larry's bankaccount was up to $60,000, but he didn't really pay muchattention. When the fraud was finally detected by the credit cardcompany, the company froze all of Larry's assets and suspectedevery transaction after that.

"The Secret Service was here to investigate," he said."They thought I stole $350,000."

When he was "borrowing" the money, he said, "Ireally never thought it was a crime. I never realized how much of adifficult situation I was putting myself in."

Larry was convicted and sentenced to ten months for his fraud.He spent two weeks in the county jail before being released to ahalfway house.

"It was terrible," he recalled. "We wore thebright orange suits, we were behind bars, the chains, the crummyfood. I was mixed in with murderers and all levels of bad deedindividuals...that was probably the worst two weeks of mylife."

Because he was forbidden from dealing with money as a conditionof his sentence, he hired someone to manage his store until hecould be reinstated.

While he was in jail, Larry's wife decided to divorce him."I lost my son out of the deal," says Larry. "Andeven though it was years ago, people still walk into the store andsay, 'I heard about you.'" Larry finds himself oftengiving in to customers who argue for a refund, saying, "Idon't want any kind of trouble."

If you really want to sleep at night, consider buying insuranceto protect your business from fraud and theft. Even with insurance,you're not totally protected, though.

"All this stuff is very difficult to prove," says TomSkelly, a Boston-based insurance agent who specializes in helpingsmall-business owners. "But once you do prove it, theinsurance company will go after the thief to try and recover themoney."

Skelly says employee dishonesty insurance is fairly inexpensiveand can be added to your basic business insurance package. Hesuggests common sense controls, including frequent cash deposits,dual signatures on big checks, and balancing the booksfrequently.

Skelly says, "You'd be surprised how manysmall-business owners just look at the money that's in the cashregister at the end of the day and say 'OK.'"

Tips on Avoiding Fraud and Theft

• Conduct a background and credit check on all new employees.Make sure you notify new employees and obtain written permission toconduct the checks.
• Make efforts to reward employees through profit sharing or byoffering other incentives.
• Compensate employees fairly.
• Separate accounting and check writing functions betweenemployees and owners.
• Have the business bank statements sent your home.
• Consider adding theft insurance to your business insuranceplan.
• If you suspect theft, contact your lawyer immediately.

Reporting by Sarah Prior.

Jane Applegate is a syndicated columnist, an author and thefounder of SBTV(Small Business TV), a multimedia resource forentrepreneurs.