Unfortunately, I’ve worked with many business owners who were victims of embezzlement prior to my engagement with them.Â It’s really not all that uncommon.Â Why?Â Because we want to trust our employees.
I’m not saying your employees aren’t trustworthy; I don’t know them.Â What I can tell you is that’s always the story I hear.Â “I thought I could trust her”, “we’ve been friends forever, I can’t believe he did that to me”, “she worked for a bank! I thought I could trust her”.Â I’ve heard all of those from owners who were cheated by that “trusted employee”.
I don’t want to scare you and I don’t want you to lose faith in your employees.Â I want you to set up some simple internal controls, so you don’t ever have to question your employee’s trustworthiness.
I’m put in positions all the time where the business owner will put me on the checking account or try to leave me a blank signed check.Â Each time, I take the opportunity to explain that I would never, ever steal from them, but it’s not a good idea to put anyone in the position of being able to steal.Â Â Then, I advise them in ways we can solve the problem (usually their unavailability to sign a check) and maintain a system of controls that protects their hard earned cash.
Here’s a list of simple controls you can put in place to protect your business and your bookkeeper:
- Open the bank statement yourself (or view them online), review the cleared checks (invest in getting copies of cleared checks if you don’t automatically get them).
- Review the bank account reconciliation with the bank statement. Ensure the bank account is reconciled in a timely manner.
- Require checks to be written sequentially. Review the check register and ask to see any missing check numbers. Voided checks should be kept on file and marked VOID.
- Have someone who doesn’t issue checks or handle cash reconcile the bank account
- Check Signing
- Do not give signature authority to anyone who reconciles the bank account or issues checks. Require duplicate signatures if you must have one of these persons on the account.
- NEVER sign blank checks.
- Do not use signature stamps.
- Request to see invoice copies for checks submitted for your signature, ensure there is a paper trail and know what you are signing.
- Have someone other than the bookkeeper check the mail, open customer payments, and list the receipts.
- Make sure you have a fidelity bond included with your business insurance package that will pay in the event of employee theft.
- Petty cash
- Set a limit on the petty cash fund and treat it like a bank account (someone who doesn’t have access reconciles it).
- Use an imprest petty cash system: require signature on a petty cash receipt for taking cash from the till and receipts/change returned to match the petty cash receipt.
- Require vacations and cross train. Have someone else perform the bookkeeping functions while the bookkeeper is on vacation.
While these controls don’t guarantee that you’ll never be the victim of embezzlement, they certainly will reduce your risk.Â
~Kelly Totten, Top CrackerJack
3 thoughts on “Trust Isn’t Enough, Protect Your Business From Embezzlement”
Your recommendations are good for those business owners that have employees that allow for division of labor – what about the tens of thousands of businesses that have ONE administrative employee?
Ruth, thanks for your comment. I think there are a number of things businesses with only 1 admin can do to limit their risk. I think many of the above items can be adapted for these types of businesses.
A *MUST* for these businesses is the owner needs to review the bank statement and copies of cleared checks. If any checks are listed on the bank statement, but the copy is missing, they must get a copy from the bank.
If you *HAVE* to have the admin sign checks, then the above step is critical. You need to know who the admin has paid. If the owner doesn’t know a payee, they’ll need to get a copy of the invoice from the admin. Of course, it wouldn’t hurt to have the admin submit check duplicates with the invoice copies, even if the check has already gone out.
For petty cash, require the owner to sign the check to replenish petty cash and receipts must accompany the check. Review the receipts before signing the check.
Just letting the bookkeeper know you’re watching will go a long way toward reducing your risk.