Small business embezzlement

Because I received a few calls within the past two months on the subject of embezzlement, I have decided to reprint the following column.

Q : We feel like fools! My husband and I just discovered that our “trusted” bookkeeper of many years decided she deserved to be our “partner.” She has been writing checks to herself, paying her personal bills, cashing checks, forging our signatures, and much, much more. Our research indicates that she began her embezzlement about two years ago which would explain our confusion as to why our cash flow has been so tight. What can we do in the future to prevent bookkeeper theft from happening again?

A : I must admit that I get a queasy feeling in my stomach when I hear stories like this. Bookkeepers are generally people we tend to trust, people we have to trust. Over my many years of practice, I have heard numerous stories involving theft and they almost all have one common theme: The victim is always quoted as saying, “I can't believe he (or she) stole from me. I trusted him (or her).” It may seem obvious, but only someone you trust will be in the position to steal from you, whereas, if you did not trust that person, you would be very proactive in preventing him or her from having the means and opportunity to do so.

It is often cost-effective for a business to maintain a small bookkeeping or accounting department to pay their bills, make deposits and process their payroll. In order to have proper internal control in your accounting department, you may need to hire additional employees to segregate bookkeeping duties and functions. Of course, this may not be a viable financial option. Hence, you need to perform a cost-benefit analysis: Does the risk of an embezzlement loss warrant the ongoing cost of hiring additional personnel? What is the premium cost to insure against employee embezzlement loss?

Having a small accounting department does not mean you have to give up obvious controls. Some controls you should consider are as follows:

· Your bookkeeper should not have the authority to sign your checks or withdraw funds from your bank accounts. Have them prepare checks for your (or another authorized individual's) signature. Before signing the checks, the support for the check should be carefully verified.

· All daily deposits should be made under your (or another authorized individual's) control, not the bookkeeper's.

· All bank statements should be mailed from the bank directly to you. You should review the canceled checks and the statements before providing them to your bookkeeper for reconciliation.

· All payroll and income tax forms should utilize your address and not your bookkeeper's address. If a taxing authority is dunning you for back tax returns, additional taxes, or penalties, you want those notices to come directly to you. In other

words, YOU want to be the first to know!

· Have all your vendor invoices and statements mailed directly to you. You should review them before authorizing payment and delivery to your bookkeeper.

· Carefully and thoroughly review the reports supplied by your bookkeeper (i.e., Balance Sheet, Income Statement, Accounts Receivable Aging, Accounts Payable Aging, Inventory, etc.).

· Perform surprise random “audits” of cash, billing, accounts receivable, accounts payable, etc.

As the owner of a business, there is no better control than good old “common sense.” As a trained auditor, I was taught to always approach an accounting situation with “professional skepticism.”

In other words, I should never be afraid to ask questions or ask for supporting documentation. Perhaps you too should use this approach.