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One of the most important things the owner or manager of a small business should do is to set a good example.
Employees watch and are prone to imitate habits - good or bad.
An employer who dips into petty cash, fudges on an expense account, uses company funds for personal items or demonstrates other loose business behavior will find employees rationalizing dishonest actions with the attitude "if it's good enough for the boss, it's good enough for me."
Another important way a small business person can discourage embezzlement is by establishing a climate of accountability. Employees should know their jobs and feel trusted. But they should also realize that they are held accountable for their actions.
To some, management indifference in financial administration is a license to steal.
That's why it is important to determine what controls should be in place to forestall any dishonest practices. And, just as important, the system should be designed to help document evidence in the event someone does try to embezzle your funds.
Often a problem that arises in fidelity loss claims is proving the amount that was stolen. Good records are essential.
A public accountant can be of great help in setting up a good record-keeping systems and establishing basic controls, and those control should be tested and evaluated to make sure that there are no loopholes through which an embezzler can manipulate your funds.
One fundamental control is the separation of the duties. For example, persons concerned with receiving checks and cash should not also be responsible for the entries in the accounts receivable records. No one person should handle a transaction from beginning to end.
If you do not exercise tight control over invoices, purchase orders, discounts, customer credits, and so forth, a business owner is asking for trouble.
While nobody wants to run a business like an armed camp, experts agree that if you have a built-in control system, administer it tightly, and audit it frequently, embezzling can be prevented.
Here is a list of precautions that small business owners should consider:
1. Always check the background of prospective employees. Sometimes you can satisfy yourself by making a few telephone calls or writing a few letters. In other cases, especially if the individual will handle accounting and financial chores, it may be wise to a credit bureau or similar agency to run a background check. (Keep in mind that the rights of individuals must be preserved in furnishing, receiving, and using background information.)
2. Know your employees to the extent that you may be able to detect signs of financial or other personal problems. Build rapport so that they feel free to discuss such things with you in confidence.
3. See that no one is placed on the payroll without authorization. If you have a personnel department, require that it approve additions to the payroll as a double check.
4. Always have the company mail addressed to a post office box. In smaller businesses, the owner-manager may want to go to the post office to collect the mail. In any event, the owner or a designated key person should personally open the mail and make a record at that time of cash and checks received. Don't delude yourself that checks or money orders payable to your company can't be converted into cash by an enterprising embezzler.
5. Either personally prepare the daily cash deposits or compare the deposits made by employees with the record of cash and checks received. Make sure you get a copy of the duplicate deposit slip or other documentation from the bank. Make it a habit to go to the bank and make the daily deposit yourself as often as you can. If you delegate these jobs, make an occasional spot check to see that nothing is amiss.
6. Arrange for bank statements and other correspondence from banks to be sent to the same post office box, and personally reconcile all bank statements with the company's books and records. The owner-manager who has not reconciled the statements for some time may want to get oriented by the firm's outside accountant.
7. Personally examine all canceled checks and endorsements to see if there is anything unusual. This also applies to payroll checks.
8. Make sure that an employee in a position to mishandle funds is adequately bonded. Let employees know that fidelity coverage is a matter of company policy rather than any feeling of mistrust on your part. If would-be embezzlers know that a bonding company also has an interest in what they do, they may think twice before helping themselves to your funds.
9. Spot check accounting records and assets to ensure all is well and that internal controls are being followed.
10. Require personal approval of unusual discounts and bad debt write-offs. Approve or spot check credit memos and other documentation for sales returns and allowances.
11. Don't delegate the signing of checks and approval of cash disbursements unless absolutely necessary and never approve any payment without sufficient documentation or prior knowledge of the transaction.
12. Examine all invoices and supporting data before signing checks. Make sure that all merchandise was actually received and the price seems reasonable. In many false purchase schemes, the embezzler neglects to make up receiving forms or other records purporting to show receipt of merchandise.
13. Personally cancel all invoices at the time you sign the check to prevent double payment through error or otherwise.
14. Don't sign blank checks. Don't leave a supply of signed blank checks when you go on vacation.
15. Inspect all pre-numbered checkbooks and other pre-numbered forms from time to time to insure that checks or forms from the backs of the books have not been removed and possibly used in a fraudulent scheme.
16. Have the preparation of the payroll and the actual paying of employees handled by different persons, especially when cash is involved.
Jim Morgan can be reached at (970) 668-3998, ext. 13100, or at jmorgan@summitdaily.com.
Employees watch and are prone to imitate habits - good or bad.
An employer who dips into petty cash, fudges on an expense account, uses company funds for personal items or demonstrates other loose business behavior will find employees rationalizing dishonest actions with the attitude "if it's good enough for the boss, it's good enough for me."
Another important way a small business person can discourage embezzlement is by establishing a climate of accountability. Employees should know their jobs and feel trusted. But they should also realize that they are held accountable for their actions.
To some, management indifference in financial administration is a license to steal.
That's why it is important to determine what controls should be in place to forestall any dishonest practices. And, just as important, the system should be designed to help document evidence in the event someone does try to embezzle your funds.
Often a problem that arises in fidelity loss claims is proving the amount that was stolen. Good records are essential.
A public accountant can be of great help in setting up a good record-keeping systems and establishing basic controls, and those control should be tested and evaluated to make sure that there are no loopholes through which an embezzler can manipulate your funds.
One fundamental control is the separation of the duties. For example, persons concerned with receiving checks and cash should not also be responsible for the entries in the accounts receivable records. No one person should handle a transaction from beginning to end.
If you do not exercise tight control over invoices, purchase orders, discounts, customer credits, and so forth, a business owner is asking for trouble.
While nobody wants to run a business like an armed camp, experts agree that if you have a built-in control system, administer it tightly, and audit it frequently, embezzling can be prevented.
Here is a list of precautions that small business owners should consider:
1. Always check the background of prospective employees. Sometimes you can satisfy yourself by making a few telephone calls or writing a few letters. In other cases, especially if the individual will handle accounting and financial chores, it may be wise to a credit bureau or similar agency to run a background check. (Keep in mind that the rights of individuals must be preserved in furnishing, receiving, and using background information.)
2. Know your employees to the extent that you may be able to detect signs of financial or other personal problems. Build rapport so that they feel free to discuss such things with you in confidence.
3. See that no one is placed on the payroll without authorization. If you have a personnel department, require that it approve additions to the payroll as a double check.
4. Always have the company mail addressed to a post office box. In smaller businesses, the owner-manager may want to go to the post office to collect the mail. In any event, the owner or a designated key person should personally open the mail and make a record at that time of cash and checks received. Don't delude yourself that checks or money orders payable to your company can't be converted into cash by an enterprising embezzler.
5. Either personally prepare the daily cash deposits or compare the deposits made by employees with the record of cash and checks received. Make sure you get a copy of the duplicate deposit slip or other documentation from the bank. Make it a habit to go to the bank and make the daily deposit yourself as often as you can. If you delegate these jobs, make an occasional spot check to see that nothing is amiss.
6. Arrange for bank statements and other correspondence from banks to be sent to the same post office box, and personally reconcile all bank statements with the company's books and records. The owner-manager who has not reconciled the statements for some time may want to get oriented by the firm's outside accountant.
7. Personally examine all canceled checks and endorsements to see if there is anything unusual. This also applies to payroll checks.
8. Make sure that an employee in a position to mishandle funds is adequately bonded. Let employees know that fidelity coverage is a matter of company policy rather than any feeling of mistrust on your part. If would-be embezzlers know that a bonding company also has an interest in what they do, they may think twice before helping themselves to your funds.
9. Spot check accounting records and assets to ensure all is well and that internal controls are being followed.
10. Require personal approval of unusual discounts and bad debt write-offs. Approve or spot check credit memos and other documentation for sales returns and allowances.
11. Don't delegate the signing of checks and approval of cash disbursements unless absolutely necessary and never approve any payment without sufficient documentation or prior knowledge of the transaction.
12. Examine all invoices and supporting data before signing checks. Make sure that all merchandise was actually received and the price seems reasonable. In many false purchase schemes, the embezzler neglects to make up receiving forms or other records purporting to show receipt of merchandise.
13. Personally cancel all invoices at the time you sign the check to prevent double payment through error or otherwise.
14. Don't sign blank checks. Don't leave a supply of signed blank checks when you go on vacation.
15. Inspect all pre-numbered checkbooks and other pre-numbered forms from time to time to insure that checks or forms from the backs of the books have not been removed and possibly used in a fraudulent scheme.
16. Have the preparation of the payroll and the actual paying of employees handled by different persons, especially when cash is involved.
Jim Morgan can be reached at (970) 668-3998, ext. 13100, or at jmorgan@summitdaily.com.
