“Trust but verify” should always be your position as a business owner when it comes to finances and assets of your organization. Sadly, long-time trusted employees are often the ones responsible for a theft or embezzlement. As technology gets more advanced and innovative – so do the thieves!
There are certainly complicated ponzi schemes and embezzlements associated with collusions and cybers attacks but it can be as simple as your office manager taking $100 weekly from your petty cash or your purchasing manager buying product from their own company at a high cost to you, keeping the profits.
Most common ways of embezzlement:
Adding family members or bogus people to payroll
Paying unknown or fake vendors
Keeping cash payments from customers
“Borrowing” from petty cash draw
Issuing bogus credit card refunds where the refunds are going to the employees credit card
Pocketing customer payments and making adjustment/write offs on the customer’s account
Charging personal items on the Company credit card
Although many embezzlement schemes are not easily detected with a “naked eye”, there are particular behaviors you should be watching out for in your organization.
Red flags to look for:
An employee never takes vacation or time off
An employee is not willing to cross-train
An employee constantly works overtime and takes work home
An employee is overly controlling of all finance functions
A change in employees lifestyle
An increase in customer refunds
An increase in accounts receivable write offs
An increase in expenses
Proper internal controls and segregation of duties are the best embezzlement prevention instruments, however, many small business owners do not have the means to employ multiple people to do a particular finance function. In that case, use your outside resources such as banks, attorneys and CPAs to help you run your business smoothly. If not preventive, you should at least have detective mechanisms to alert you if there is a potential threat.
Steps to prevent embezzlement:
Applying payments to the customer accounts and making deposits should be done by two separate employees
Bank reconciliations should be done by an outside person (usually your CPA firm)
Credit card terminals should have a password for issuing credit card refunds
Mail should not be received exclusively by one person
Maintain an approved vendor list and review new vendor additions
Review monthly bank statements and cancelled checks
Review monthly credit card statements
Review financial trends monthly and verify that variances are explainable
Approve each payroll run
Listen to your instincts! If you become suspicious don’t turn the other way but start digging.
One can never imagine that such a thing can happen to their business…but embezzlements do happen and more often that we think. If you have no segregation of duties in your practice which is common due to small size, rely on your CPA to at least prepare monthly bank and credit card reconciliations and perform monthly financial analytics.
It all starts with the tone at the top so establish strong financial practices in your office and adhere to them. Existing employees will appreciate a solid foundation and a clear understanding of how things need to be done. New hires will recognize how much you respect finances and know what is expected of them. They will understand that your business is organized and minds the money.