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Embezzlement and Fraud In Your Gym
by Rita Brown - Brown's Gymnastics Training Centers
Jan. 27, 2014

Unfortunately, employee theft in the gym exists but as an owner we just don't want to believe it could happen to us! In a report by the ACFE (Association of Certified Fraud) examines a typical organization loses five percent of its revenues to fraud each year, translating to a potential projected global fraud loss of more than $3.5 trillion.

DISHONESTY
Most employees who commit occupational fraud are first-time offenders with clean employment histories; the ACFE found that 87% of occupational fraudsters have never been charged or convicted of a fraud related offense. What's arguably worse is that 84 percent when caught had never been punished or terminated by their employer for fraud-related conduct. As gym business owners we have a right to protect our property. We also have the responsibility to recognize potential areas or opportunities that can prevent unnecessary losses by people we trust and need.

Determining why dishonest employees act the way they do is the first step in understanding and eliminating potential holes in your program. As stated in Cheryl Burgess article, The fraud triangle is known as Cressey's Fraud Triangle, helps model the factors that cause an employee to commit occupational behavior: perceived opportunity, perceived financial need, and rationalization (Figure1) 3,4


Fig. 1. Cressey's Fraud Triangle Illustration how an employee can rationalize fraudulent behavior.

OPPORTUNITY
Opportunity is the first and most important element in the triangle. You can effectively deter employees dishonesty by putting policies, procedures, and processes in place that will reduce opportunities for fraud significantly. Deputize only a few trusted individuals to handle financial matters and deal with billing, collections, and banking. Especially in small programs, there is a tendency to cross-train employees to complete various tasks so that other staff members can "step in" if another is out on the floor, out of the office or at a meet. This allows everyone to help but no one is actually accountable. Financials are something you should never cross-train.

In the same vein, passwords for all financial systems, accounts, etc., should only by known by the few individuals that need to know them, and always by the owners of the gym. If you allow staff members to set their own passwords, be sure there is an override that owners can use at any time. Also, when choosing gym management software it should offer more than one level of security and access. No one should have the ability to over-ride or change the amount of a charge , payment made or how it was paid; without a way of tracking it. When it comes to online banking, I always preferred to do my own. It takes minutes to do; I am the only person with the username and password. Likewise the owner should be the only person who accesses and pays bills online.

For material items, office supplies, gym supplies, pro-shop, chalk and training supplies there should be sure an inventory control system in place. Current in-stock inventory should be checked against sales on regular basis. High priced items should be stored under lock and key.

Burgess reports that most individuals steal because they can, but most employees embezzle because they are under financial strain. Pressure to steal comes from many reasons. Employees may have bad credit or overwhelming bills that they can't get grip on. Perhaps they are living beyond their means. With today's economic conditions many people are in the midst of debt and foreclosures. As an employer it is wise and savvy to keep your eyes and ears open to try to spot a person who actions demonstrates a need or pressure to find cash!

Rationalization is prevalent among embezzlers, they often have an attitude for justification. "They will never miss it" or "I am not stealing; I work hard and deserve it." Be in tune to this mind set. Look for signs, because they are there, subtle but there.

SIGNS TO WATCH FOR
Reports claim that employees embezzled thousands or millions of dollars from businesses, but that's typically over the span of several years. Embezzlement tends to start small. Petty cash and other small funds are common first target. Snack bars, icee machine/vending machine - money, and the petty cash drawers are the usual and easiest targets.

On a personal note, I had a trusted long time employee whose job was to post payments in the computer and make the deposits. I was the only one who reconciled the monthly statements which is the recommendation by most business consultants. Don't allow the person making the deposits to reconcile the monthly statements unless they are the owner. So, my trusted employee/manager took the tuition money and posted it as paid. Over time he began slowly pocketing cash. It started as a few hundred dollars at first and ended up over $6000 a month. With the complexity of running five gyms from one location it was difficult to spot this deception. And it started slowly and over three years of my five locations before I figured it out.

In short he got sloppy. But so had I! The signs were there and I didn't recognize them. Perhaps I didn't want to and in reality I trusted on and relied on that employee partially because he knew more about the computer system than I did. My attitude was that it "Could never happen to me", because I was smart and a good business woman, respected in the gymnastics world. Over time, my trusted employee had stolen over $175,000. When I was able to prove what had been going on for years, I felt betrayed, shocked and angry. I had trusted this person as though he was a member of my family.

It is important to keep tabs on your cash. Someone should reconciles daily so you will be alerted to any discrepancies. Anything over $10 especially if it is reoccurring could be a sign of an employee "testing the waters". You should publicly address the shortfall with all the staff, so they know you are paying attention. If the discrepancy continues, then more intensive investigation may be warranted.

CHECKS AND BALANCES
To protect yourself and your gym, consider creating procedures to help identify unethical and unprofessional conduct. Before hiring employees, verify their references and hold a background screening and credit check. Encourage your staff to become a professional member of USA Gymnastics. USA Gymnastics requires background checks with professional membership.

Take a zero-tolerance approach: "We prosecute employee theft," and follow through with it. After learning the hard way; I added an umbrella policy to cover theft and embezzlement to my insurance coverage. It is not expensive and must is an add-on providing that extra coverage.

Review the books yourself at regular intervals and randomly, so employees never know when you may request reports. Also conduct periodic audits with your accountant. Give employees separate responsibilities: those employees who order should not receive the orders; an employee handling cash should not manage or have access to the books.

Many gyms have no-refund policy, which reduces another opportunity for employees to hide theft as "refunds." If you offer any refunds, only the owner should be able to authorize it. Consider installing video surveillance system and using a drop safe that is monitored.

Protection begins with you. It is important for gym owners to be familiar with their income streams and do regular bookkeeping audits.

Above all, set a good example and stress business ethics.