How to Avoid a Thief in Your Business

How to Avoid a Thief in Your Business

I recently wrapped up yet another significant fraud examination for a small business client who trusted her bookkeeper infinitely. Sadly, all too often, the thief in your company is just that – the person my clients keep closest. Someone in their inner circle. Someone they keep company with. All the red flags were there. The client could not get basic financial reports from her bookkeeper. The bookkeeper’s lifestyle did not match her income. Answers to basic financial questions were met with plausible explanations, but no documents or proof. Why would they be? After all, the bookkeeper was infinitely trusted.

While a resolution to the case has provided my client with clarity and a sense of peace, there is no undoing the betrayal my client is still grappling with. The comments I hear all too often in my office came from this client as well: “I’m such an idiot that I let this happen,” “I’m so embarrassed,” “I thought I was immune to something like this.” Those statements and emotions ranging from sadness, to despair, to anger, are not an anomaly. Whether my client is running a small privately held company or a large publicly traded entity, their reaction is consistent.

Call it what you will: white collar crime, embezzlement, employee theft – it is a risk that all organizations face, and no one is immune. There’s not a thief in every company, but there is always an opportunity for fraud to happen. This risk is not a small one. According to the Association of Certified Fraud Examiners, each year companies lose on average 5% of their revenues to fraud-related losses. As someone who has dedicated her accounting career to fighting fraud, I can tell you that there is a single common denominator in every single fraud-related case I’ve been involved with: the fraudster was someone who held a position of trust with ownership and/or management.

And fraudsters manipulate that trust to gain access and perpetrate their crimes. Crimes that go unnoticed, typically for more than a year and in excess of $100,000. The best advice I can give a small business owner in fighting fraud is to change your mindset. I know that you’re thinking that you’re immune to fraud risk. You may even lull yourself into reassuring thoughts such as:

“We have great internal controls.”
“We have the best employees.”
“Cash flow has been ‘off,’ but there must be another reason.”
“Our auditors give us a ‘clean bill of health’ every year.”

But if you change your mindset to consider the thought that employee theft could happen in your organization, then the next logical step is to think of who. Who, in your organization, has access to money coming in? Who has access to your disbursements (payables, payroll, credit cards, etc.)? Who prepares and pays your payroll taxes? Who has access to customer billing? Who has authorization levels for spending, budgets, or approving new vendors? Who orders parts or services? Who takes money to the bank? Who regularly submits expense reimbursements? You get the idea.

Changing your mindset is the hardest part. Once you acknowledge that no business is immune and that even your great company may have unmanaged risk, you can then segregate duties and establish internal controls, including:

Cash receipts: Segregation of duties is key here. The employee collecting funds and posting payments should not be the employee who bills customers. Similarly, the employee collecting money and posting to customer accounts should be kept separate from making a credit or write-off to a customer’s account.

Check disbursements: Ensure that bank statements and cancelled check images are returned from your bank each month and reviewed by someone other than the bookkeeper.

Debit or credit card disbursements: If employees carry company debit or credit cards, ensure that daily and monthly limits are in place and monitored, and that all receipts are retained by the employee and remitted before the end of each month.

Payroll: One of the most common ways small businesses are victimized is the failure of their bookkeepers to pay payroll taxes. The non-payment of the payroll taxes effectively gives the fraudster “more money” to steal. I encourage small businesses to use your CPA or outside agency to process your payroll, payroll taxes and payroll tax form filing.

Changing your mindset means reducing your risk of fraud, keeping your assets safe, and implementing controls that keep your employees safe in their jobs. It may also mean that you never have to experience a Thief in Your Company.

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