A knock on the door one Saturday morning in 2019 changed Susan and William Frew’s world.

A letter carrier delivered an official notice from the Internal Revenue Service, stating that the Frews’ plumbing business, Sunshine Home Services, owed $486,000 in back taxes, penalties and interest. Additionally, Susan, president of the company, was penalized $209,000 for signing inaccurate tax forms. But the bad news didn’t end there. Sunshine Home Services also owed vendors $175,000.

Suddenly, the Denver-area company was $1 million in debt, and the Frews were on the verge of losing everything they had built since opening in 2008.

THE INSIDE JOB

Business owners are frequently told to be wary of external threats like cyberattacks, vandalism and theft. However, internal threats and criminal activity are just as real. Employee theft can devastate a business financially, not to mention the emotional toll it takes on everyone involved. A bad hire’s misconduct or criminal acts can compromise the foundation of an organization.

The Frews abruptly learned the consequences of putting too much trust in their office manager. Looking back, Susan says she can see where mistakes were made. Serving also an author and business consultant, she traveled a lot and  left the day-to-day business operations in the hands of the office manager. Frew trusted the manager, and they were good friends. As an incentive, Frew offered the manager a monetary bonus if the company stayed within its budget.

“All of a sudden, she was on budget all of the time,” Frew says.

Unfortunately, Frew failed to see this as a red flag. The office manager made only partial payments to vendors and the IRS, so the company quickly started accumulating debt. The office manager also used company credit to buy gas for her family’s vehicles and purchase tools and tires from company vendors for her family. Everything came to light when the employee W-2 forms didn’t match Sunshine’s quarterly tax payments. Even before this occurred, Frew says she and the office manager had a falling out, and the manager was fired. Still, the damage had been done. The employee was charged with six felonies and is now paying $100 restitution monthly.

DIFFICULT LESSON

As a business owner, Frew learned some important lessons from this experience. Today, Sunshine Home Services is much more careful when hiring employees. In addition to the standard criminal background check the company uses, Sunshine also runs a civil background check. The civil background check uncovers information about an applicant’s financial penalties like bankruptcies, liens and garnishes. Sunshine Home Services also checks references, even in today’s tight labor market when it’s tempting to skip this extra step.

 Additionally, Frew set up alerts on her corporate credit card, so she’s notified every time the credit card is used. She also has the only key to the company’s mailbox.

“You have to get your own mail,” she says. “If I got my own mail, I would’ve caught this a lot sooner.”

Now, Frew looks at every single invoice and makes it a daily habit to reconcile the business accounts between the bank and Sunshine’s customer relationship management software.

“I really have gotten more involved in oversight,” she says. “A lot of business owners don’t want to do that, but it’s absolutely essential. Since we’ve been doing that, we’re able to find problems right away and fix them.”

Sunshine also hired an outside accountant to review the company’s books on a regular basis. Susan recommends finding a bookkeeper who is highly referred. She also recommends verifying financial statements with a third party.

“You and your bookkeeper shouldn’t be the only ones looking at the books,” she says.

Frew also encourages business owners to learn to read and understand business finances.

“Because this spooked me so bad, I have been doing an accounting course to get an accounting certificate,” she says.

SETTING UP PROTECTIONS

Frew realizes now that she stepped away from the business too soon, when it wasn’t ready to operate without her. Plus, Sunshine didn’t have the proper safeguards in place to prevent this type of employee misconduct.

Realistically, employees require a certain level of authority and trust to run operations, but employers also need to implement checks and balances. Certainly, employees can run a business, but they also can ruin a business. When business owners assume that every position has the capability of ruining their business, they realize the importance of internal protocols and controls.

To make it clear that employee theft won’t be tolerated, employers can work with their attorneys to develop an anti-theft policy for the employee handbook. The policy should include examples of prohibited behaviors and the consequences of violating the policies. Consequences may include immediate termination, police involvement, legal action and financial arrangements for restitution.

Employers may also want to install video surveillance to discourage and uncover attempts of employee theft, especially of cash, supplies and equipment.

The theft of personal and corporate data is another internal threat to companies. Several different types of data can be vulnerable, including customer lists, product research, business plans and proprietary recipes or formulas. Many businesses protect their trade secrets by having employees and business associates sign nondisclosure agreements. This prohibits individuals from sharing trade secrets, processes and other proprietary information with a third party. Companies should clearly mark proprietary information as confidential, identify it with a watermark and have processes in place for handling and safeguarding. Sensitive data warrants the extra effort required to prevent unauthorized use and ensure the data is eligible for legal protection.

THE LONG PAYBACK

Employee theft comes in a variety of forms. Too often, small businesses are caught off guard by internal threats and crimes by employees.

“I know that I’m not alone. I’m not the only business owner who’s gone through something like this,” Frew says.

Her advice to business owners in similar situations is to take it one day at a time.

“Come up with a plan and stick with it,” she says.

Sunshine made small payments to its vendors each Friday — days Frew ironically referred to as “Fun Friday.” By the end of 2022, Sunshine had repaid $750,000 of its $1 million debt. The recovery has taken time and effort, but Sunshine Home Services is getting back on course.

“There were a couple of years that the business was just an anchor tied around my neck, and now I’m enjoying it again,” Frew says.