Set Up Internal Controls

Why Employees Find it Easier to Commit Fraud in New Businesses: How to avoid it

Why Employees Find it Easier to Commit Fraud in New Businesses: How to avoid it

The other day I was talking my friend Cynthia who owns a water vending business. She is the only borehole owner in the vicinity willing to sell water to the neighbouring residents. If you live in Eastlands Nairobi, you may be in an area where piped water is scarce. So often, you will see people with water containers heading to buy the precious commodity.

Apart from owning a borehole Cynthia owns an apartment and her tenants are all so grateful for the piped water delivered right inside their houses. Cynthia has employed a caretaker, Julius, to ensure the apartments are clean and well maintained. The caretaker doubles up as the water vendor. On a normal day, about 400 neighbouring residents will line up to buy water from Cynthia, each parting with atleast Kshs 5. This means that each day, Cynthia collects not less than Kshs 2,000. In a month, that would add up to Kshs 60,000. Cynthia told me that these are statistics she established after getting more involved in the water business.

Prior to that, Cynthia had dismissed the water business as not being lucrative. So she never bothered to get involved and understand the daily operations. Julius had seen this loophole and decided to be remitting Kshs 2,000 per month as water sales proceeds. He would then steal the balance of Kshs 58,000. This went on for a year before Cynthia discovered the fraud.

You see, Julius’s lifestyle had changed dramatically over a period of one year. He managed to set up a transportation business with 3 motorcycles. His house was fully furnished with state of the art furniture and electronics. Cynthia knew that Julius could not afford those motorbikes and his highflying lifestyle with the salary that he was getting.

One day, Cynthia decided to check what really happens in the water business. The first day, she sold the water by herself and managed to collect Kshs 2,400. On the second day, she collected Kshs 2,100. After doing the business for a week, she realised that the average sales were Kshs 2,000 per day. Cynthia calculated that she had lost about Kshs 696,000 for a period of one year to Julius.

Cynthia’s story is not unique. Most startups are not well controlled. Too often, the owners trust the employees and they don’t bother to put checks in place to deter fraud. The employees soon realise that nobody is checking what they do. When they steal the first time and they are not caught, they will do it again and again until it becomes normal. Lack of regular checks is definitely a good incentive to steal.

In Cynthia’s case, there are obvious checks and controls she could have put in place to deter theft.

1. Learning the day to day operations prior to fully entrusting an employee on the job

Many business owners make the mistake of hiring employees and letting them be in charge without bothering to know what exactly happens on a day to day basis. After all, they are the bosses, so their work is to supervise. That is such wrong mentality that could cost you millions.

In a startup environment, it’s critical you learn the nitty gritties of the business before fully entrusting it to an employee. That way, you will have a true picture of what happens on the ground and form reasonable expectations of revenues plus costs. You will also know where the loopholes are and how to seal them.

2. Conducting unannounced surprise checks

This technique of conducting unannounced surprise checks works miracles. It’s my all time favourite especially if your business is in a different location from where you normally are. You will be able to observe activities in their most raw form, unedited and unprogrammed for your eyes. You see, most employees will make sure that they have put their best foot forward on the day you are visiting them. But if you surprise them, you will see what really happens without all the paraphernalia.

3. Segregating the duties of selling water and collecting the money

Whenever possible, the duties of selling and collecting money should be handled by different people. It is harder to steal when the duties are performed by different people. This is because, it is more difficult to collude with another person compared to when you are doing everything by yourself.

4. Pointing out the controls to the employee to deter them from committing fraudulent activities

Business owners have the responsibility of educating their employees on the risks and the consequences of committing fraud. This will deter those who have the opportunity to commit fraud from even thinking about it. They will know that the consequences are grave and will avoid them.

5. Conducting a lifestyle audit of the employees

As a business owner, you should be aware of your employees’ lifestyle. This way you can be able to determine whether the employee’s lifestyle is commensurate with the known income source. Drastic changes in their lifestyles could point out to fraudulent activities within the business.

Back to Julius and Cynthia…

Of course Julius got fired and replaced by a new employee. Cynthia now checks her business on a regular basis. She also keeps an eye on the new employee for a change in his lifestyle.

As the business owner, you have ultimate responsibility and accountability for the working and effectiveness of internal controls.



Hello there | I am Ave Kernyan | Founder of Aves Business | Self driven entrepreneur and business management consultant | DIY Junkie | Over 10 ye ....

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