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What's New
Protect Your Business—
Stop Embezzlement Before it Starts
The other day I was speaking with a colleague whose bookkeeper of sixteen years had been embezzling money from her business—quite a lot of money, as it turns out. Whether it’s theft of money, inventory or equipment, or whether it’s theft of intellectual property, nearly every small business at one time or another will experience some kind of employee theft or fraud.
Small businesses are particularly vulnerable to these swindles because they rarely have the resources or security controls in place to stop them. Many small businesses rely on one person to complete all their accounting and bookkeeping transactions. This person opens the mail, processes accounts, makes deposits, handles invoices, and oversees petty cash. While most individuals will handle this work with complete honesty, this kind of unrestricted access makes a business vulnerable.
My colleague had trusted her bookkeeper completely, giving the woman full access to all accounting information. This individual opened the mail and had access to online bank and stock information. In the bookkeeper’s own words, she began “borrowing” money to help her meet her monthly bills. “I had every intention of repaying what I took,” she said when the theft was discovered, “but when no one noticed, I started taking a little bit more and the next thing I knew I was writing a check to myself every week.” My colleague has decided not to press charges against the bookkeeper but has placed a lien against the woman’s home. In addition, a full-blown investigation is underway to determine the total amount taken. Lack of attention to the accounting process has cost my colleague dearly. Not only is she dealing with the fact that she was robbed and betrayed, but it is going to cost her more money to determine the full extent of the crime.
A newer client of ours was also subject to fraud by an employee who inflated the number of hours worked. The employee claimed to have come in an hour-and-a-half earlier than the scheduled shift for several days. Because employees were not required to “punch in,” the business, according to state law was required to pay those hours because it could not be verified whether the employee worked or not. Since this incident, we have helped our client implement a new policy surrounding employee scheduling and time tracking, and the employee has been issued a warning.
Employee theft and dishonesty costs U.S. businesses billions of dollars each year. Small companies have the most to lose because embezzlement, stolen trade secrets, or missing inventory can cripple a small firm and even put it out of business. The only way to prevent theft is to devise prudent, effective controls in all areas of potential exposure and to enforce them consistently.
Did you know SUMSOLUTIONS offers professional accounting services with built in controls to prevent fraud and embezzlement? This month, SUMSOLUTIONS has compiled 8 tips help you create effective financial controls:
- Keep duties
separate: No single employee should control a financial
transaction from beginning to end. The person
who writes your checks should not
be the same person who signs your checks. The person
who opens the mail should not also
record the receivables and reconcile the accounts. By
dividing up responsibilities, you
will make it more difficult for a person to steal from
you and manipulate the records to
cover it up.
- Get
your bank statements personally: Don’t give a person
who is in a position to embezzle
a chance to destroy or remove evidence of the wrongdoing.
Inthe case of my colleague, she requested a copy of the
bank statement from thebookkeeper but the bank statement
either was not provided or was incomplete.The business
owner or an outside accountant should receive unopened
bank statements and
canceled checks each month. Review these carefully. Examine
the payees, signatures, and endorsements on each check.
- Closely
guard your company’s checks: Don’t be careless
with your checks. Keep
your checks locked in a drawer and don’t give out
the key. Use pre-numbered checks,
and frequently look for missing check numbers. Have a “voided
check”procedure in place that requires you (the owner)
to validate all voided items. Never sign a blank check.
- Sign or verify
every payroll check personally. This may take some time,
but it is
generally worth it. Review the checks to make
sure they are for people you know. If there is a name
you don’t recall, go find that
person. Keep a weekly count of the number of people on
your payroll, and verify that number against the number
of checks you have. If you are
using the direct debit feature that most payroll companies
offer, either make sure you are calling in payroll yourself
or are reviewing
the payroll reports to make sure there is no one being paid
you do not know.
- Watch your
receivables closely: Have more than one employee involved
in counting
and verifying incoming receipts. Make sure all
incoming checks areproperly endorsed. Purchase a “For
Deposit Only” stamp
with your account numberon it and have all checks restrictively
endorsed when they are opened. This can prevent an employee
from cashing a check that is not made out to them. Personally
investigate customer complaints that credit has not been
received for payments. Get a
copy of the front and back of the customer’s check,
and be sure it was deposited into your business account.
- Make your
bookkeeper take vacation: An employee who is embezzling
from you
may need to make a continuous effort to conceal this
kind of stealing.Many small business owners are
surprised to discover employees who appear loyal—employees
who never take vacations and never stay home sick—are
actually stealing
from them. The reason these people have to be in the
office constantly is to
cover
their tracks. Insist that the employee who performs the
bookkeeping take a
vacation
every year. Ideally this vacation
should be at least two weeks in
length,
and occur at the end of the month, when the books
are being closed.
Use
this time to have your books reviewed by someone else and
look for
discrepancies.
- Make sure
you understand your books: Embezzlement commonly occurs when
bookkeeping is sloppy and unsupervised. As the
business owner, you must be familiar with your company’s
bookkeeping and recordkeeping system. This way you can
easily review the books and make sure nothing is amiss.
If you are nota “numbers
person” have
your accountant spend some time with you to show you
what
to look for, or take an accounting or bookkeeping course. Trusting
someone
else
to oversee this most important part of your business
only opens the door
to
fraud.
- Secure
your bookkeeping software. Don’t allow unauthorized
access to your
bookkeeping
software, and make sure that each user has his or
her own
username
and password. Don’t share the administrative password
with anyone other
than
you (the owner). Have each user change his or her password
frequently to lock
out
unauthorized persons from this program.
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