BY Bernie Hull

Why does something like this happen to good people—Trust. According to FBI profiles, an embezzler is typically an employee with 5-6 years of experience, often described as good-to-above average, highly desirable, reliable, bright, motivated, trustworthy, and an achiever with good self-control. The typical motive is the need for money caused by a specific problem.”

Potential warning signs:

  • Unusual behaviors—for example, making sure she always gets the mail, intercepts phone calls, never takes vacation—even when on vacation, etc.
  • Lack of timeliness in updating/reconciling the accounting records

Do you have to stop trusting people to avoid such a thing from happening to you? No, but you need to implement good internal controls to reduce the risks. In my opinion, an honest bookkeeper would welcome the fact that controls are put in place—if for no other reason than to avoid the risk of ever being accused of wrongdoing.

Tips to consider:

  • Hire smart—develop accurate job descriptions and MUST do reference checking. During reference checking, make sure you ask former employers, “Would you rehire this person?”
  • Evaluate your internal controls—either on your own, or with the help of your CPA. (IC questionnaire)
  • Remember that as a manager or small business owner you are ultimately responsible for the numbers—so get involved in the process
  • Receive all mail—consider having post office hold mail until you return from vacation, if office is closed in your absence.
  • Review statements from vendors. Many vendors have stopped sending statements, but they will send late notices. Make sure your business is in good standing with vendors. Long overdue invoices may be an indication that a check you thought was going to a vendor actually went in someone else’s pocket, or that an invoice had been overlooked.
  • Receive bank statements directly, unopened. Insist on cancelled checks or check copies. Review cancelled checks for reasonableness of date, payee, amount, authorized signature and endorsement on the back of the check.
  • Review the bank reconciliation every month. This step is particularly important if you have one person doing the bookkeeping, writing checks, posting entries, preparing financial statements. Look closely at any adjustments to the bank accounts. Are there any old outstanding checks/deposits listed on the bank rec.?
  • Scan the check register periodically (every 3-4 months) to verify all payees and amounts paid make sense. Multiple checks written around the same time to the same vendor could be an indication that funds are being diverted—or just an inefficient use of time to write and code multiple checks. Verify check number sequences.
  • Review all credit card statements—are all charges authorized? Look for unusual late fees and finance charges. Pay off credit card balances monthly to avoid late fees. (Financial management point—check into lining up a line of credit with your bank—before you need the money, to manage short term cash flow/seasonal issues—at a lower rate and fees than a credit card.)
  • Review all payroll tax reports—consult with your CPA to verify deadlines and make sure that all reports are filed on time. Consider asking for account transcripts from the IRS and contact WDR at least annually to verify that all taxes were paid on a timely basis and that there are no balances outstanding.
  • Review payroll registers – review frequency of paychecks and amounts paid for reasonableness. Hand out pay checks/ pay stubs.
  • Review your accounts receivable aging summary schedule on a regular basis. This is beneficial not only to determine if you have any slow paying customers. It may also disclose if any customer payments have been misapplied.
  • Evaluate controls over inventory. Establish records to properly and consistently track inventory. Do period physical inventory counts and compare to your perpetual inventory system. Are controls implemented to reduce risk of theft?
  • DON’T EVER pre-sign blank checks. Keep all blank checks in a secured location—with you controlling the key/combination. (Anyone can forge a check.)
  • Make sure employees who can handle cash are bonded. Do you have embezzlement/theft insurance in place? Is it adequate to cover a potential loss and professional fees to determine amounts taken?

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