Small Business Face More Fraud in Downturn
By SIMONA COVEL
Cash-squeezed privately held companies are facing another threat in this struggling economy: rising employee fraud. Employee fraud -- from check-forgery schemes to petty-cash theft -- tends to rise during tough economic times, when workers are feeling financial pressure in their personal lives, experts say. And small companies are especially vulnerable because they often lack stringent internal controls to prevent fraud. Sometimes, managers at affected companies attribute lost funds to lower sales -- never even suspecting foul play.
"A lot of times a small business will close its doors, and may never know they were defrauded -- that the problem wasn't a declining economy, that employees were stealing," says James D. Ratley, president of the Association of Certified Fraud Examiners (ACFE), an antifraud trade group based in Austin, Texas.
Jeffrey Sklar, a partner at Bellmore, N.Y., accounting firm Sklar, Heyman & Company LLP, says in a tough economy employees may feel pressure to maintain a certain lifestyle, or they may succumb to pressure from family or friends who know they have access to cash at work. In some cases, they may resent a business owner who drives a fancy car when they're struggling to make ends meet.
"Desperate people do desperate things," he says.
Karin Wilson, the co-owner and president of Page and Palette Inc., a bookstore in Fairhope, Ala., says she was burned by a trusted employee. Sales at the family-owned business began to slide in the second half of last year. By the holiday season, money was so tight the store ran out of some books. But it wasn't able to order more because vendors wouldn't extend the store any additional credit. Ms. Wilson, 40 years old, figured the vendors were reacting to the credit crunch.
Then the week before Christmas, she saw a bill for the company's credit-card account. It said the company was months late on its payments. She began examining accounts and soon put together the pieces. Ms. Wilson claims the company's former bookkeeper, who had a personal credit card with the same bank, had used funds from the company's bank account to pay off her personal credit card. And Ms. Wilson says she kept paying her personal bills with company funds even after resigning in October.