Losses due to check fraud exceed $13 billion a year. Surprised? You shouldn't be. Employee theft costs U.S. businesses $40 billion a year, according to the Department of Commerce. And fraud and abuse account for $400 billion annually, according to the Association of Certified Fraud Examiners. In a 2002 survey, Ernst & Young pegged the total at 20% of every dollar earned.

Embezzlement, false overtime, padded expense accounts, misappropriation of materials and company assets, check fraud, outright theft: No matter how big or small your company is, you're vulnerable.

Here are the stories of five home improvement contractors who at some time have been victims.

Case File: Employee Theft It was late Friday afternoon. The office was nearly empty. Charles Gindele, president of Dial One Window Replacement Specialists in Santa Ana, Calif., was sitting at his desk doing paperwork when a paint shop employee knocked on his door. The employee, Gindele recalls, was clearly uncomfortable, talking all around what he had to say. Finally it came out. The employee was there to report that an installer, a supervisor, and a third employee were using the company door shop to build doors for themselves. “The real culprit was the installer, who was in the middle of it and selling the doors somehow,” Gindele says.

Gindele checked out the story and, one by one, confronted the men. The door shop employee claimed he'd been coerced and had received no money. “We gave him the benefit of the doubt,” Gindele says. The shop supervisor admitted his guilt, was dismissed, and left quietly. The installer was another matter.

“He erupted,” Gindele says. “He was abusive and denied everything.” In the middle of their conversation, the man stripped off his company shirt, hurled it at Gindele, and stormed out. Later, he retrieved “a toolbox full of rivets, screws, and nails and threw the box on my desk,” Gindele adds.

Aftermath: Gindele concedes the company didn't have adequate systems in place to control inventory, and hiring was pretty informal. Not anymore. Dial One has a full-time human relations manager. Managers are more accountable for what they produce. Candidate screening includes drug tests, background checks, and behavioral profiling.

“Our hiring process is 10 times better than it was five years ago,” Gindele says. And nothing is built in the door shop or painted without a written purchase order. Every piece of material must be accounted for. These changes, Gindele says, “sent a message that stealing is not acceptable. If you steal, you're gone.”

Case File: Check Fraud Rick Duggan, president of America's Best Home Remodelers, Golden, Colo., found out — not once but twice —that the criminal rings that specialize in check fraud through counterfeiting hit fast and move on quickly.

“When you pay anyone by check, somebody handles that check, and they can make a copy of it,” he explains. Using computers, the thieves create counterfeit checks for that account and start cashing them.

“They didn't make the checks look like mine. They just had the account number, routing number, and my [forged] signature,” Duggan explains.

The trick is to make the checks look like payroll checks and write them for relatively small amounts — several hundred dollars each in Duggan's case. The thieves cash the checks in such likely spots as large grocery stores. Counterfeit checks are printed with a legitimate company name and phone number. In his case, “it was a cell phone number, not our number.” If a store employee calls, the thieves answer with the company name and, of course, state that the check is valid.

In Duggan's case, a supermarket manager whose suspicions were aroused alerted him. She told him the store's policy is to cross-check the phone number on the check against a company's yellow pages number before cashing it. However, a store employee had failed to follow procedure. In one weekend, thieves cashed some $10,000 in counterfeit checks on Duggan's account.

When faxed a copy of the check, Duggan verified that it was counterfeit. He immediately notified his bank and closed the account. Thinking he'd outsmart the thieves the next time around, Duggan had all his checks labeled as being from a petty cash account. It didn't work. He was hit again this spring.

Aftermath: This time the thieves moved too slowly and were caught. Duggan notified the bank quickly. The bank, in turn, did not charge for the new account and supplies.

Duggan's liability was limited by provisions of the Uniform Commercial Code adopted in all 50 states. Under the code, a bank can charge items against a customer's account only if they are “properly payable” and the check is signed by an authorized individual. However, businesses must follow “reasonable commercial standards” and exercise ordinary care in dealing with checks to avoid possible liability.

Case File: Embezzlement It's great to be able to trust employees, but that trust can be expensive when it turns out to be misplaced, as one Wisconsin replacement contractor, who requested anonymity, learned several years ago.

As one of her duties, the company's new office manager picked up and sorted the mail each morning. She retained items to be entered into accounts payable, “so we could keep up with our bills,” this company owner explains.

One day a preapproved credit card arrived. The office manager retained it, forged the president's signature, and began to enhance her lifestyle, courtesy of her employers.

“She bought furniture, computers, software, lamps, just about any household items you can imagine,” the company owner says. “When the bills came in, she would simply process and pay them. We never saw them.”

There was more to come. The woman used closed or canceled job numbers to get a full set of home improvements. “We put in a new roof, siding, and a house full of windows for her.” The employee explained to installers that she had things worked out with the owners and was paying through a payroll deduction.

Her schemes came to light one day when a personal package was erroneously delivered to the office. With suspicions aroused, “we decided to locate the invoices.” She had helped herself to some $20,000 in 18 months before slipping up.

Aftermath: The woman was prosecuted on criminal charges, found guilty, and is serving jail time. The contractor's insurance company covered the loss. Today, this owner processes his own mail and shreds all preapproved credit cards. He and his business partner hand out checks on an as-needed basis and personally oversee all payroll and accounts payable activity. He's had to relearn to trust employees. That took a couple of years.

“I hate to say it, but you really have to be careful about who you trust to handle the money in your business,” says the owner. “You have to have controls in place to make sure the money that's going out is going where it should.”

Case File: Misappropriation of Assets In the land of Tony Soprano, it may come as no surprise to learn that when two employees of Joe Percario Inc., Roselle, N.J., wanted to start their own business using company assets, they decided to go into waste management.

The company owns two trucks, which are used to carry construction materials back and forth to jobsites, and several Dumpsters to haul trash to area transfer stations, explains president Joe Percario. Percario's extensive roofing, siding, and window replacement business generates lots of jobsite debris. The Dumpsters are often moved from site to site to be filled before going to the transfer station.

In June, Percario's secretary got a peculiar phone call. A local contractor wanted another Dumpster dropped off in Plainfield. Percario isn't a commercial hauler and doesn't rent his Dumpsters to other businesses.

Percario “put a tail on the guy we thought was dirty.” The mystery was quickly solved.

“My drivers were taking half-full Dumpsters to other contractors, asking if they wanted to throw some garbage in,” he explains. “They were charging $100 or $200 to top these things off and then take them to the transfer station.”

Percario was losing money in several ways. First, he pays for waste disposal by weight. Typically, then, he spends $10,000 a month on transfer station fees. In May, his bill jumped to $17,000.

“If you think about it, two full-time drivers could dump only $10,000 of garbage a month. But then they almost doubled my garbage bill in the same amount of time. And I'm paying them!” he says.

Of course the drivers were also conducting business on his time, using his equipment, his gas, his insurance — more losses for Percario. Subsequent investigation also showed that good building materials were getting tossed along with the trash, because some employees were too lazy or careless to separate it for return to the warehouse.

Percario is also facing some $50,000 in fines for discrepancies between the loads his trucks dumped and the required paperwork that covers the origins of the load, possibly because Percario's Dumpsters were hauled from jobsites not his own.

Aftermath: Now, “I don't let the left hand know what the right hand is doing,” Percario says. “Before, the drivers were in charge.” Now, a warehouseman stages the loads for the trucks and the drivers “just drive.” Percario has created several forms that let him track the movement of all materials and trucks. Drivers must note where they go, their pickups and deliveries, and estimate the type and percentage of the load. Employees in the office review and monitor the records for discrepancies. The forms are simple to fill out and the benefits are significant. Percario estimates that his operations are getting done “with 20% less movement by being smarter about it. It's just being organized,” he says.

“You have to believe that everybody is mostly good, but you still have to have everybody checking everybody,” he says. —Jay Holtzman is a freelance writer in Jamestown, R.I.

Case File: Terror Attack Criminal behavior isn't the only unpredictable element business owners have to deal with. Imagine an act of war practically at your doorstep.

“We were front and center because we live so close,” says David Moore, chairman and CEO of Garden State Brickface, in Roselle, N.J., 10 miles from the World Trade Center. On Sept. 11, 2001, installation crews that left the warehouse at 6:30 or 7:00 to work in New York returned at 10:00 and 11:00. “The city was locked down,” he says. Moore couldn't get home to his family in Manhattan that night; he slept in the office.

“When it happened, it felt like the end of the world as we know it,” Moore recalls. Every employee had a friend, neighbor, or family member who worked in or around the World Trade Center. New Jersey commuter trains pass under the buildings. People feared further attacks, and there were scores of bomb scares in Manhattan.

Providing a degree of normalcy seemed like the best policy as the tragedy unfolded. And normalcy meant staying open.

A strong work ethic is at the core of company culture, Moore explains. “We always choose to work” during blizzards, severe storms, the kind of events that periodically disrupt the normal routine, when employees can't get to work, he says. “We never close. That's how we deal with adversity.”

That attitude served “as an anchor for all of us” at the time, Moore says. Although many sales calls were canceled and telemarketing was curtailed, most jobs in progress continued. Moore talked to company employees about being in uncharted waters and reassured them. “It was important to keep operating, to communicate with everybody directly. We didn't take for granted people's concerns, or their need to know they were going to get a paycheck, or that we cared,” he adds.

Aftermath: Business in September fell by more than a third. The company cut costs to prepare for a downturn, but business rebounded quickly. “We were surprised by the resilience of the marketplace,” Moore says. The company improved its planning for dealing with disruptions and made sure it could communicate with all employees in that event.