Controls

Recently, my attention was drawn by another local bookkeeper being arrested for fraud. In this case, the bookkeeper had managed, over a period of six months, to embezzle $275,000.00 from the company she worked for, and the police believe there may have been other victims!

$275,000 over a period of six months. That’s crazy! That will destroy most small businesses, and a lot of mid-sized ones as well!   We all want to believe our staff is honest, but the sad truth is that if you leave an opening for theft, somebody (not everybody) is going to take advantage of it.  Ideally, the person who helps you with this is your bookkeeper, but clearly that is not always the case.  So, what steps can we take to protect ourselves?

Protect Your Bank Account

Do not allow unfettered access to your bank accounts.  Not ever.  If your bank will allow you to set up templates – use them.  Limit where and how your AP staff can send money.  Set up a second approving authority.  If you do not want to do it yourself, and you are too small to have a second accounting staff, consider hiring an outside controller.  Talk to local bookkeeping or accounting companies to see if they have the ability to serve in this capacity.  The cost for this can be quite affordable – and definitely cheaper than fraud if it occurs.  Have a person not responsible for entering and paying bills perform the bank reconciliations.  Again, you can use an external service for this if you are a small business.  Do not allow any employee sole signing authority on your bank account.  Either you sign, or two employees sign, with a third employee (or external party) reconciling accounts.

Reconcile and Review Everything

Again, if necessary, hire an outside service to oversee this.  Vendor statements should be reconciled.  Customer statements should be reviewed.  Suspicious revenue reversals should be questioned, as should suspicious payments.  All bank account transactions should be reviewed to ensure they make sense.  In the case of the person mentioned above, she wasn’t even that smart about her theft – she received email transfers, deposited them into the company bank account, then transferred them out to her own account.  A simple review of the bank transactions would have instantly caught this large amount of money being stolen!

Inventory Counts

If you are conducting regular inventory counts, you can catch discrepancies and monitor for employee theft.  Have service store clerks count high value, high theft items (lottery tickets, cigarettes, etc) at the beginning and end of each shift.  Implement periodic inventory counts to ensure acceptable loss levels.  If the loss starts to increase, conduct more frequent counts – and try to narrow down a reason for the loss.

Implement Cash Controls

Count cash yourself, or have a second person count cash in a designated area that is monitored by video surveillance.  Watch for cash shortage trends.  Implement a POS system that scans barcodes into a system.  This system can also be used as a double check for inventory counts to help reduce theft.

Use Purchase Orders

Requiring the use of purchase orders makes it more difficult for employees to engage in fraudulent purchases.  Monitor the purchase orders.

Control Vendor and Customer Set Up

Allow only one party, not the party entering invoices and printing cheques, to set up new vendors and customers.  This will prevent the employee from fraudulently sending goods or submitting false invoices from a fake vendor for payment.

Ultimately, when it comes to protecting your business and your assets from unscrupulous employees, we should hope for the best – honest employees – but prepare for the worst.  It can make the difference between success and failure for your business.