Desperate times – not so desperate measures

I am consistently amazed by the amount of inappropriate control many of my clients give their bookkeepers and in-house accountants. As an entrepreneur myself, I can understand the relief these owners must feel when they finally find someone they can trust, but trust is not an internal control.

Unfortunately, some of my clients are victims of embezzlement at the hands of key employees. And while I understand that one has enough to worry about with the woes of the current economy, business owners need to know that the recession can provide a great cover-up.

I recently investigated a case in which a long-term employee embezzled more than $250,000 by blaming the losses on the economy. My client told me, "I didn't think we had enough money to steal!"

According to the Association of Certified Fraud Examiners' 2008 Report to the Nation, the typical organization loses 7 percent of its annual revenues to occupational fraud.

The median loss of all frauds reported, in terms of dollars, was $175,000. This is up almost 15 percent since 2004. Think about what you could do with that. Reinvest in your business? Pay your employees a modest cost of living adjustment? Perhaps even pay yourself?

Several small, but significant changes in the oversight of your banking and accounting functions can greatly reduce your risk of fraud:

  • Mail bank statements and cancelled checks to your home – More than 90 percent of all fraud cases reported involve some sort of cash larceny, fraudulent check or payroll schemes. The majority of these schemes are quickly discovered from a thorough bank statement review.
  • Segregate duties – Don't give check signing authority to the same person who reconciles your bank statements. The person who applies payments to customer accounts should not be preparing deposits and taking them to the bank.
  • Require mandatory vacations of at least one week in duration – Key accounting employees should be required to cross train at least one other individual and take a mandatory one-week vacation annually.

If accounting is not your area of expertise, it is important to compile a team of experts to help you be successful. Your CPA can consult on your specific operation and assist with implementing improved controls or providing the additional oversight you need.

Your banker can also be a part of that team. Most sell products that help mitigate the risk of fraud. A few of these are:

  • Online Banking – This provides up-to-the-minute status on your accounts, so you can stop unauthorized activity immediately instead of waiting for your next statement. You can view the detail of recent deposits and withdrawals, as well as access customer service.
  • Positive Pay- This is an automated check matching service that compares checks you've issued with checks presented for payment. You provide your bank with a file containing the detailed information related to check disbursements. Any check presented for payment that doesn't match a check in your issued file is presented to you for a pay/no pay decision, stopping fraudulent checks before they are processed.
  • Lockbox – Lockbox services allow you to process payments more cost effectively by outsourcing your accounts receivable to your bank. Allowing your bank to receive your payments potentially reduces your overhead costs and provides you quicker access to your funds.

Keeping your finances healthy and secure is central to the success and profitability of your business. If what I'm telling you seems time consuming or daunting, it doesn't compare to the time, expense and heartache involved in conducting a fraud investigation.

You don't have to go it alone. Take advantage of the resources around you to compile a team of experts to walk with you on the road of success, freeing you to focus on your passion – the business at hand.

Tiffany R. Couch owns Acuity Group PLLC, a forensic accounting firm. She can be reached at 360-573-5158 or tcouch@acuityforensics.com

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