Experts offer small businesses advice on avoiding fraud

Wednesday, February 23, 2011

Last week's arrest of two men accused of transferring more than half a million dollars as part of a kickback scheme at DeWitt in Sikeston, Mo., should warn business owners to look for opportunities for fraud within their own companies, local experts say.

Small businesses are more vulnerable to employee fraud than larger companies because they usually have only a handful of trusted employees and lack internal controls, said accountant Alan Kridelbaugh of Begley, Young, Unterreiner and White LLC, a certified fraud examiner.

"A lot of businesses keep it quiet because they don't want the publicity," Kridelbaugh said. "We only hear about a fraction of these cases."

Since the economic downturn, employee fraud cases are on the rise, Kridelbaugh said.

He said a standard financial audit usually will not detect kickback schemes like the one in which former DeWitt employee Jason Mitchell of Jackson and Rajiv Toprani of Clarksville, Tenn., the owner of a textile supply company that partnered with DeWitt, were charged Tuesday.

A typical kickback scheme involves overbilling by a vendor with a percentage of the sale paid back to the purchasing organization's buyer. Prices are inflated to help offset the cost of the kickback to the buyer.

Businesses that obtain competitive bids on a regular basis involve more than one employee in the approval of bids, rotate purchasing agents and rotate vendors are less likely to have an environment where a kickback scheme could occur, Kridelbaugh said.

Employee fraud comes down to motive and opportunity, said Jennifer Hendrickson, president of Hendrickson Business Advisors, which has assisted companies in preventing fraud and advises companies that have recently experienced an embezzlement.

"There is no way of telling which employee or which job description is more or less likely to steal from their employer," Hendrickson said. "The range can be from a brand new employee to a business partner."

More than 85 percent of people who commit an occupational fraud have never before been charged or convicted of a fraud-related offense, according to a 2010 report by the Association of Certified Fraud Examiners.

The median loss caused by the occupational fraud is $160,000, with the fraud occurring for 18 months before it was detected, the report said.

Both Hendrickson and Kridelbaugh suggest having an outside consultant, such as a business adviser, accountant or lawyer, routinely look at how a business operates to help identify opportunities to prevent fraud.

Segregating employee duties is also key, they said.

"Employers should segment duties so that multiple people are involved in any process that involves money, but there are so many ways that embezzlement can happen, it's impossible to make a comprehensive list of hard and fast rules that will cover all the bases," Hendrickson said.

She recommends businesses conduct new hire and random drug testing as one precaution.

"Employees that are mentally compromised at work or have an expensive drug habit may be more likely to steal from the company if given the opportunity," she said.

Employers can also reduce the likelihood of an embezzlement by:

* Conducting a background check on new employees through a website like, a locally owned company.

* Have workers sign an employee manual that clearly explains all policies and procedures.

* Implement a separation of duties so there are checks and balances in place among employees.

* Provide a safe way for other employees to report suspicious activity without fear of retribution.

Kridelbaugh recently launched a Fraud Alert program for local businesses and a toll-free fraud reporting service, 855-Fraud-Tip, where people can anonymously report fraud at their workplace.

Occupational fraud is most commonly detected by a tip but also is frequently discovered by accident, internal audits and external audits, he said.


Pertinent address:

2103 Themis St, Cape Girardeau, MO

1729 William St., Cape Girardeau, MO

Map of pertinent addresses

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