The news headlines are full of reports of bookkeepers embezzling from their employers. Some of these, just in Maine for 2017 alone, are:How does this continue to happen? We have security systems for our homes, anti-theft locks on our cars, and PIN codes for our debit cards. And yet, a distracted business owner will give unlimited access to a bookkeeper because they “seemed nice and honest”.
Ronald Reagan was famous for using an old Russian proverb regarding arms control with the Soviet Union - “Trust, but Verify”. To deter embezzlement, this proverb could be re-worded to say “Verifying with procedure makes trust irrelevant”. Even a few simple procedures can go a long way towards preventing theft by a bookkeeper, accountant, or controller. Some of these steps are:
- Throw out that rubber stamp! Only the owner or a bonded manager (who does not perform any financial functions) should be able to sign company checks or use a company credit/debit card. If this is too restrictive, establish a “small expenses” bank account with a limit on the number and amount of transactions.
- Review the bank statement every month. With paper statements, the old procedure was to have the small business owner receive the unopened envelope for the bank statements and cancelled checks. With electronic access to statement and check images, a small business owner should regularly log into the business bank accounts and review the transactions, statements, and check images.
- Regularly review your customer accounts receivable. That customer who is always late in paying may be in fact unknowingly funding the theft of funds from your company, with the embezzler covering their tracks by falsifying the customer invoices and payments. Look out for an excess number of credit memos, corrections, and other suspicious activity
- Regularly review your vendor lists and activity. Make sure that all vendors are known and approved, and that the transactions match records that are directly from the vendor. Most embezzlement occurs via a fictitious vendor account, where the bills and payments appear “reasonable” and are never verified.
If there was one overarching principle regarding theft prevention, it would be “Don’t give the scorekeepers the keys.” Anybody that has the ability to initiate transactions and the ability to record the transactions is a potential embezzler. Separating access to funds from the recording of transactions is the most basic tenet of effective internal control over a small business’ assets.
These steps alone will not only actively deter embezzlement, but also let employees know that the small business owner is “following the money”. It is vitally important to establish a financial culture not on trust, but on procedure and accountability. At Berry Talbot Royer, we can help establish policies and procedures that substantially reduce the chances of employee theft. Give us a call to talk to one of our CPAs about these steps.
[i] Murphy, Edward D. (2017, May 18). Bookkeeper embezzled more than $850,000 from Daniel Lilley law firm, lawsuit alleges. Portland Press Herald. Retrieved from http://www.pressherald.com.