FIVE STEPS TO FRAUD-PROOF YOUR WELLNESS BUSINESS

READING TIME: ABOUT 5 MINUTES

Dishonest employees steal more than shoplifters...almost ten times more, in fact.

Most employee frauds start out small and escalate when no one notices. 

Protect your business by putting these simple checks and balances in place. 

1) Guard against payments to fictitious suppliers.

We've seen situations where employees created fictitious suppliers, wrote them checks, and secretly cashed the checks themselves. 

For example, your assistant invents a fictitious vendor, "Yoga Mat Warehouse".  She then creates fake invoices, writes and signs checks on your business account to Yoga Mat Warehouse, and sends those checks to the ostensible Yoga Mat Warehouse post office box.  Then she picks up the checks at the post office, endorses them, and deposits them to her own account.

If you authorize anyone other than yourself to sign checks, put controls in place to make sure that only legitimate vendors receive payments. 

• Cap the dollar amount of checks that others can sign. 

• Require a second signature, preferably yours, on checks which exceed that maximum. 

• Review check images provided monthly online or in your statement for vendor names you don't recognize and for unusually large amounts.

• Never, ever put your signature on a signature stamp that you allow others to use.

2) Reconcile and review your bank statement monthly.

We worked recently with a wellness business whose trusted clerk - a long-time employee - had stuffed bank statements in his desk drawer to hide the fact that he was writing checks against a little-used business account and pocketing the cash. 

• Keep a list of all open bank accounts in use by your business.

• Whoever prepares the reconciliation shouldn't have signature access to your accounts.  Otherwise, it's like asking the cat to keep an eye on the canary! 

• Review the bank statements and bank reconciliations monthly. 

• An added bonus:  you may catch a bank mistake.

3) Split financial responsibilities among individuals.

It's rare for several employees to conspire to defraud your business.  It's far more common for a single employee to steal from your business.  For example, if a single employee is responsible for all financial transactions related to the spa, he can record, say, five bottles of massage oil for internal use when in reality only two were used in the spa and he sold the other three to friends and pocketed the cash.

• The person responsible for billing clients should not also be responsible for receiving and posting payments and making billing adjustments.  This is particularly important if your business is often paid in cash  - like a wellness center that handles insurance co-pays, or a spa or pro shop that receives cash for product sales.

• Don't allow your outside accountant to sign checks on your business account.  Think of them as an independent third party who can help you keep an eye on things.  If they have access to business assets like cash, you've compromised their independence.

4) Conduct pre-employment background checks.

We were shocked to find that a very promising job candidate for a management position had a criminal record for shoplifting.  And we've routinely seen inflation - or invention - of academic credentials like degrees.

• Run background checks on people you're planning to hire -- and request written consent to do it.  That helps protect you legally - and it encourages candidates with dubious records to withdraw from the process. 

• Even if the candidate has a clean record, just knowing that you ran the background check communicates your "trust but verify" philosophy to managing the business.  It puts them on notice that you're vigilant.

• Background checks are quick and relatively inexpensive - usually less than $100 per candidate, depending on scope. 

• Discuss bonding your employees with your business insurance broker if your business handles large amounts of cash, employees have access to business accounts and other significant assets, or your employees routinely visit clients' homes.

5) Apply good business practices to everyone who works for you.

Sadly, we have seen numerous business owners burned by deeply trusted family members and friends - even spouses and siblings.  Often these people were indeed reliable and trustworthy for many years...until something changed. 

Unknown to you, your brother or sister-in-law or cousin may have massive credit card debt.  A close friend may have a sudden cash crunch because their spouse just lost a job.  Your son or daughter may have a substance abuse problem.  Or they're simply living a steak lifestyle on a peanut butter budget.  We could go on and on. 

You simply can't know everything that's going on in someone's life...even someone very, very close to you. 

• Don't give family and friends the "keys to the kingdom". 

• Apply the same good business practices described above that you'd use with other employees.

And last but not least...

• It's also a good idea to require mandatory annual vacations for all employees with access to cash or other business assets. 

We're talking a week or two, not just a long weekend.  If they've been hiding information which would reveal their fraud, you'll improve the odds of catching it while they're out.

• In smaller wellness businesses, we suggest that owners periodically pick up the incoming mail themselves. 

It's a quick way to spot-check vendor invoices, late notices, and other potential red flags.