- The Washington Times - Monday, February 18, 2002

It's hard for outsiders at this point to understand what really happened at Enron Corp., and which executives and directors knew of the company's irregular accounting practices.

Whether or not you believe the chiefs at Enron when they say they were out of the loop on questionable dealings, the scandal poses a question for small-business owners: How do you keep track of what your employees are doing?

Many owners are so focused on building their companies developing new products and services and meeting with customers or clients that they don't know when something's gone wrong. And it doesn't have to be the result of dishonesty. The problem can be employee mistakes or ineptness.

"It happens all the time, but there are many ways to avoid it," says James Schrager, a professor of entrepreneurship and strategic management at the University of Chicago Graduate School of Business.

Mr. Schrager advocates what he calls "management by walking around" watching what's going on at your company and having serious discussions with employees about the business.

"Part of a top manager's job has to be staying in touch with what's going on in the organization," Mr. Schrager says. But he acknowledges that to an entrepreneur used to thinking ahead and taking a forward-looking approach, "this is sideways and even backward-looking, and many managers find that hard to do."

In that case, the solution is to organize your company in a way to give yourself the most protection possible against wrongdoing or incompetence.

Mr. Schrager suggests a business owner find the very best person possible to help run the company, "a No. 2 who's very good at following up, very good at seeing that policies are implemented."

Your second-in-command "has to be looking out for weird things," Mr. Schrager says. "It may not be wrong or dishonest it may be that a truck arrives and sits for 12 hours before it's loaded."

Of course, hiring a No. 2 might raise further questions.

"You're never sure," says John Rudy, owner and president of Beacon Consulting Associates in Matawan, N.J. "Sometimes it's your most trusted employee who does something wrong."

Mr. Rudy's answer is to have two persons, to create checks and balances. "You need someone who's running the operations of the business, and separately, you need a good controller who watches the guy who's running the business," he says.

Keeping track of company information can help you detect any problems. Mr. Rudy says owners need to closely watch financial numbers including sales and gross margins and look for signs of trouble.

It's also important to know what kind of close relationships form between employees, particularly those with access to financial data, trade secrets, client lists and other critical information.

"You almost don't want the employees to become too friendly with each other," says Scott Keating, an assistant professor of accounting at the University of Chicago's graduate business school. "It's not surprising in a lot of small businesses that you'll see a close relationship between the owner and the controller or bookkeeper. You'll often see the bookkeeper separate from the rest of the organization."

Two years ago, a relationship between employees with access to company information led to a crisis at Project Solvers Inc., a 14-year-old apparel and retail industry staffing firm in Manhattan.

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