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Petty Larceny Inc.

Enterprise -- In Box


Last year, 19% of small companies experienced employee fraud, up 2 percentage points from 1995. The latest annual small-biz study from Arthur Andersen & Co. and National Small Business United says only 17% of companies with fewer than 20 workers faced this problem. But companies with 20 to 99 employees (35%) got ripped off almost as much as companies of 100 to 500 (39%). The average amount taken was $9,800, although most companies lost less than $5,000. The good news is, internal controls revealed the problem in 61% of the cases. Just 5% were clued in by honest employees, while 12% found out by accident and 9% through anonymous tips.EDITED BY EDITH HILL UPDIKEReturn to top

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Desktop publishing may have made the company newsletter a breeze, but the same inexpensive technology has also given rise to low-cost, high-caliber check fraud. In 1995, banks lost $615 million to phony check schemes, according to the Federal Reserve. Estimates of total fraud losses -- including those absorbed by businesses and individuals -- range from $10 billion to as high as $50 billion. "The ability to duplicate a check is easier than it was even five years ago," says Randy Templeton, a senior vice-president at Telecheck, a check-clearance company.

Driven by these huge write-offs, banks and businesses are pioneering a technique called "positive pay" to fight scamsters. Generally speaking, here's how it works: Using accounting and database software, a company regularly sends the bank a "positive file" that lists all the checks written against an account. That file includes a complete record of each check's issue date, amount, and payee name. When a check reaches the bank for payment, the bank compares the check against the positive file. That flags any forged checks, as well as authentic checks whose payee name or payment amount may have been altered. Discrepancies are reported to the company, which can then choose to stop payment. "This gives companies extra peace of mind about fraud," says Nick Alex, a senior vice-president at NationsBank in Atlanta.

Positive pay is used mostly by large companies, where high-volume check-writing -- particularly for payroll -- has long made them vulnerable to attack. Insurance companies like positive pay because it helps stop criminals from passing off fake settlement checks (which are often issued in large, lump sums). Though only a handful of small companies have adopted positive pay so far, industry experts expect the number to grow in light of increasingly sophisticated check fraud and banks' equally aggressive campaigns to stop it.

As part of those efforts, many banks, such as Texas Commerce Bank, now offer positive-pay plans for free. Others tack on a nominal charge. Unfortunately, setting up a positive-pay system is not as easy as installing software and hitting a button. Large corporations spend tens of thousands of dollars integrating their accounting systems with the banks' positive-pay applications. The problem has been made only worse by a lack of industry standardization. "In most cases, the bank requires a company to conform to its proprietary formats," says Philip Grannan, vice-president of Boston-based Bottomline Technologies, a positive-pay software company. NationsBank's Alex agrees: "This is not an easy thing to implement."

That's why, for now, positive pay is probably best-suited only for those small businesses writing large numbers of checks (for instance, property management and temporary services firms). But banking officials predict that more small companies will be able to take advantage of the fraud protection as banks begin to make their software more compatible with standard, off-the-shelf accounting programs such as PeachTree Software's Accounting for Windows. "Because of all the losses banks are taking, they are going to start making a push for companies to use this," says Gary McNamee, president of IPS in Boston, another positive-pay software maker. Not all banks offer the service, however, so check with your local branch for availability.

Of course, positive pay will never entirely eliminate check fraud, but it just may give desktop-publishing-savvy crooks a taste of their own high-tech medicine. And that's something businesses -- both large and small -- can feel positive about.By Dennis Berman in New YorkReturn to top

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