Contractors must avoid the 'trust trap'

BUSINESS IS GREAT! You’ve been a member of Contractors 2000 now for a few years. You’re implementing programs and systems and growing your company. You’ve developed a fine management team, and you finally feel like you can back off those 80-hour weeks you’ve been putting into your company since you started it. You’re proud of the employees you’ve found and brought into the company.

We’re all dreaming of a scenario where we can take weeks away from our companies and they continue to run like the engine of a prized racecar. You want to evolve from entrepreneurial to managerial.

When you reach the point where you can delegate responsibility for your company’s operations to your employees, be careful of getting caught in the “trust trap.” It’s where you transfer authority to an employee to manage a part of your company. This may be something as small as letting a tech restock his truck from your inventory or giving a bookkeeper authority to sign and send out checks.

You think you can take your eyes off the business for a little while and relax, but can you? Before you relinquish that authority to someone else, you have to put in place a system of checks and balances. The only guarantee to foil the trust trap is for you, as a business owner, never to completely remove yourself from checking every facet of your operation.

Here’s a real example of what can go wrong. This recently happened to one of our members. For the purposes of this article, I’ll call the company Perfecto Plumbing.

It can happen here

Perfecto had a long history of family ownership. Inventory management was a nagging problem that had burned out everyone who tried to tackle it. The company’s inventory department had plumbing parts going back to the ’30s, with no comprehensive identification, tracking or management system in place. One of its employees, who had been working for the company for two years, wanted to organize and manage the company’s inventory.

“He was gung-ho that he could do it,” says “Martha,” Perfecto’s owner. “This employee had been doing a good job for our company. We wanted to turn it over to somebody else who could get a grip on all its problems and implement solutions. That was two years ago. We never thought for a minute he was going to do the kind of stuff he did.”

He started small, selling parts and materials to employees. If he was paid in cash, the money and paperwork would never make it to the office manager. Perfecto didn’t have an inventory control program in place, so his actions went undetected.

“He got bolder from there,” Martha says. “His brother-in-law worked for us in our showroom. The two of them worked a scam where they would write fake orders, as if people had come into the showroom and ordered a particular fixture. They would write an order but not turn it into the office. Instead, they could attach a copy of the invoice to a purchase order, so it looked like he was ordering something for a customer.

“Several times, the two would work late on the same nights, and I suspect that was when they would move the material out of our shop. He would then resell it. He told another employee he had a business out of his garage. We later found he had turned in an invoice for material that we never received. It was an invoice from his ‘company.’ He told the accounts payable person the packing slip wasn’t included with the merchandise but it was OK to pay it because he was authorizing it.”

How Perfecto caught onto him was a real fluke, she notes.

“We have direct accounts with several manufacturers,” she explains. “One manufacturer, with whom we have had a long relationship, called to verify if we were changing our address to a post office box. He asked our general manager why we would change the address we had had for 20 years to a post office box? That’s when the general manager began checking into the scheme.

“It turns out, the inventory manager was sending faxes to our direct account vendors, asking them to change the company name and address to his company with a post office box as an address. Eventually, he was going to change all our direct accounts to his company and then start selling material back to us or leave and have all our direct accounts. Once he broke the boundary between getting the checks cut on his word, he had free rein. The accounts payable person was not supposed to pay any invoice without a packing slip, but she did it anyway because everyone trusted him.”

By the time Martha had enough evidence of his scams, he took about $5,000 a month for his last six months. The six months prior to that, he was likely stuffing $2,000 a month in his pockets from Perfecto.

Trust trap triage

When the inventory manager and his brother-in-law were fired from Perfecto Plumbing, Martha reinforced the policy that invoices are not paid without a packing slip. It’s now a fireable offense.

“If the accounts payable person would have known her job was on the line, she would have come to me and asked if cutting checks would have been OK,” Martha says.

The next thing Martha did was dive into the inventory, organize a parts identification and quantity management system and get it computerized. She wanted to at least get it started and work out the bugs as she went along. In Martha’s opinion, a questionable activity will show up quicker from a computer report than a handwritten one.

Hiring two people from the same family will be a lot tougher at Perfecto Plumbing from now on.

“Anytime two people are able to get together and coerce on something, it’s going to happen,” Martha says. “Owners need to understand that. Be careful about hiring related employees.”

A much more rigorous system of checks and balances is being drafted by Martha for Perfecto Plumbing. She is looking through her entire company and says no one person will have authority anywhere there’s a chance of fraud or where resources can leak from the company. It will require at least two employees and maybe more.

Martha blames herself for the whole incident. She didn’t want to deal with the inventory issue and that opened opportunity’s door.

“I think people just need to be really careful about being too trusting,” she says. “No matter how detached I become from this company, I’m now going to keep my eye on everything. At least spot-check operations. You have to give notice to your employees that you are watching.

“Sometimes I’ll go through the accounts payable and won’t see anything out of the ordinary. I’ll ask to have some checks copied from office employees. They’ll think I’m looking for something. It tends to keep them on their toes. No matter how well you’ve delegated, the bottom line is, as an owner, you have to keep your visibility within your organization high.”

Contractors 2000 is a member-owned best practices group based in White Bear Lake, Minn. Bob Mallory can be reached by phone at 888/609-5490 or by e-mail at [email protected].