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To prevent fraud, don't make it easy

I remember when I first met him. He looked so sharp in his expensive suit. Every accessory was perfectly coordinated, even the dapper handkerchief in his jacket pocket. He looked great, and his family looked great. Sharp. Impressive.

He introduced himself as a new member of our church congregation who had been transferred to Colorado as the controller of a Fortune 500 company. Wow, I thought, this guy has it all. Why can't I be more like him?I had wished before that I was more like others. Yet as I became better acquainted with them, I discovered that my place in life as a struggling small-business man on the edge of financial independence -- or ruin -- wasn't so bad after all. I have since learned that many people who look fabulous, have great images and terrific jobs are sometimes plagued with problems that aren't as easily seen as the challenges faced by the rest of us struggling mortals.

Still, at the time this guy really did appear to have it all together.

Months later I was to meet him under different circumstances. I was on a jury of sorts, and he was the accused. He had been charged with fraud and embezzlement from a former employer in the eastern United States. His crime had been discovered and his smooth, impressive persona was beginning to crumble. Within a few weeks, his life collapsed around him and he and his family left the area in haste and disgrace. I was sad for him.

A year later, I happened to move to the state where he was living. I sought him out to see if I could help him with his rehabilitation.

Unfortunately, he was in trouble again. He had been hired in a new financial position and his pattern of fraud and embezzlement had repeated itself. Only this time he was heading for jail as a two-time convicted felon.

Another quick relocation to an Eastern city prevented the jail time. But to this day, his spotty job record plagues him.

How sad! A pattern of dishonesty, coupled with the lax employment practices of some employers, have been the ruination of a man who appeared to have everything going for him. Today his future, and the future of his family, is uncertain and insecure.

I asked my friend what small-business owners and entrepreneurs could do to prevent others from doing what he did. His answers were direct, candid and made good sense.

1. Segregate accounting duties. He said the accounts payable duties should be performed by a different set of eyes than the individual doing the bank reconciliation. My friend's dishonest approach worked because he always performed both of those duties himself, so he was able to submit bogus invoices from his own bogus business and then issue company checks to pay those invoices.

2. Don't delegate check-signing. If the company is not too large, the owner should personally sign company checks. The owner should also review the backup paperwork as he signs the checks.

The actual writing of the checks can be delegated.

3. Never sign blank checks. On the few occasions I have done that, I have always asked for a written receipt to be returned to me at the end of the day. I also write in the payee name, as a minimum.

4. Check references on all financial hires. Never hire anyone in a finance or accounting department without checking references. My friend said he has been hired repeatedly in financial positions without references even being requested. It would be wise to check for criminal records as well. Talk personally with past employers before hiring someone who will be handling money.

5. Don't treat anyone like family -- not even family. Everyone is open to temptation. Don't make it easy for anyone to have access to funds, especially cash, without having two sets of eyes checking each other. Sometimes lives are ruined by making it too easy for people to do bad things.

My friend says he hasn't embezzled any money since he came very close to going to prison. I hope I can trust him. He certainly still looks very honest.

Stephen W. Gibson is BYU entrepreneur-in-residence. He welcomes your comments and questions at (fax) 801-373-1316, or e-mail Gibsw@aol.com.