Deterring financial fraud by workers
Dear Karen: How do I keep employees from stealing from my company if I delegate financial tasks?
Answer: U.S. businesses lose about 7% of annual revenue to fraud, and small companies report a median loss of $200,000 to employee fraud, according to the Assn. of Certified Fraud Examiners. Typically, embezzlement schemes last two years before detection.
Dana Basney, director of forensic accounting services for Mayer Hoffman McCann, said you should divide accounting functions among workers, and don’t give the person who collects your cash access to your accounts receivable.
“Perform background checks on all your employees. Do not rely on a trusted individual’s recommendation -- obtain information about potential employees from an independent third party,” Basney said. You should get bank statements and canceled checks directly from the bank and review them before giving them to any employees.
And have your accountant periodically review your internal controls and records. “This tells employees that others are watching,” Basney said.
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Avoid borrowing from your 401(k)
Dear Karen: I’ve heard that it’s possible to borrow from a 401(k) to start a new business. Is this a good idea?
Answer: Borrowing from 401(k) funds for risky ventures like business start-ups could be disastrous for many Americans, most of whom are already short on retirement savings, said Michael Kresh, a certified financial planner and founder of Creative Retirement Literacy. Studies show that people who borrow from their pensions -- even if they repay -- have substantially less money in retirement because of loss of compound interest.
“If you miss a payment on a 401(k) loan, it is considered to be in default and must be repaid. If the entire loan becomes taxable as income, a $10,000 loan could easily become a $13,000 loan with a 10% penalty added for early withdrawal,” Kresh said.
Borrow against your 401(k) plan only as a last resort. First, try applying for a small-business loan or borrow from family and friends. Or delay starting the business while you save money.
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Chapter 7 isn’t the only solution
Dear Karen: My brother and I are over 65 and have owned an unprofitable gun store for two years. We worry about losing our life savings in this business and have considered bankruptcy, but the shop is registered in my brother’s name and he filed for bankruptcy in 1999. Can he still file for Chapter 7, given the changes in the law?
Answer: If you have primarily consumer debt, qualifying for Chapter 7 has become complicated, said M. Jonathan Hayes, a Woodland Hills bankruptcy attorney. But “if more than half the total debts are business-related, virtually anyone qualifies for Chapter 7,” he said.
Even if the store is in your brother’s name, it is likely that you’re considered partners, Hayes said. If you file for Chapter 7, a Bankruptcy Court trustee would close your business and sell it. He or she could use your personal assets to pay creditors and fees, Hayes said, unless you incorporate first.
Explore selling or liquidating your business before you resort to bankruptcy. For more information, see Hayes’ blog, at lawprofessors.typepad.com /bankruptcyprof_blog.
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