With the economy improving, John was thrilled to see his small company starting to boom. He was so busy taking on new customers and training his new staff that he delegated bookkeeping to a long-time employee he trusted.
As time passed, John noticed discrepancies in the business account and ultimately discovered the employee had been embezzling money.
Unfortunately, John’s experience is not uncommon. Embezzlement is a reality and is often difficult to detect. What could John have done differently?
Embezzlement is a crime of opportunity and trust. A trusted person is placed in a position where he or she has complete access to the business financials, typically with little or no oversight.
HONESTY FIRST
The way to prevent embezzlement is first to be honest yourself in your activities – leaders must lead by example. Second, pay your employees well and treat them well. Third, and most important, hire the right employee to manage business affairs. Start by checking all references. Run a criminal background check. Consider getting fidelity bond insurance coverage on the person. If the employee is not bondable, do not let him or her handle your financial matters.
Beyond those basics, here are some simple techniques that reduce the opportunity and temptation for embezzlement.
Assign designated duties. Do not have only one person handle the incoming mail, make deposits, balance the checkbook and send statements. It can be difficult to divide these duties in a smaller business with only a few staff members. In this case, you need to handle or outsource payroll, tax preparation, checkbook balancing, and management of accounts payable. If you outsource this work to a bookkeeping company, due diligence in inspecting the bookkeeper’s work is very important.
Review the reports. Every day, you should have on your desk an end-of-day report, an adjustment report, and a history of payment that breaks down cash receipts, credit card payments, checks and outside financing for services. You should compare the deposit slip receipt to the deposit. Do an occasional mini-audit of the books. Let your staff know you’re looking daily by questioning them. For example, say: “I see Mrs. Smith didn’t pay for today’s service. Is there a reason?” This shows your employees that you keep an eye on the day’s activity. These checks take five to 10 minutes of your day.
Review your bank statement. Inform your staff that they are not to open any mail from a banking institution. Even better, have your bank statements sent to your home address if your mailbox is secure. Scan the checks that were written. Your signature should be on each check.
Know where your money is going. If you do use an employee to process your accounts payable, develop a system for your mail. Staff members should put the incoming mail in one location on your desk. Review the bills and put them into an in-basket for the employee to process. Have the person print the checks and attach them to the invoice. Then sign them. If you don’t recognize a check, question it. Different staff members should stuff the envelopes and mail the payments. If the same person pays and stuffs the envelope, the checks can be changed.
Establish office policies. Make deposits daily, close and balance each day, bill as services are rendered, and send periodic statements if purchasing extends over time. Review your monthly reports. Close out each month before running the reports to prevent changes from happening. Write pre-numbered receipts for all cash payments and monitor petty cash. Keep all records at the office. Do not allow employees to work extended hours. Establish password control for sensitive areas, such as payroll.
Watch your overhead numbers. Learn to read your financial statements. You should know the basic overhead numbers for the business. One common embezzlement system involves double payment for supplies, or the creation of dummy vendors. Another example is the ease of obtaining preauthorized credit cards in your name, using the credit card to pay personal bills, and developing schemes to pay the credit card. Run periodic credit checks on yourself and watch open lines of credit.
Be a fair, consistent and honest leader. Leaders live in glass houses. You can’t expect your staff to model differently than you yourself behave. Don’t take supplies from the office home – that teaches your team that stamps, pens and office supplies are all right for them to take, too. Watch your use of time in the office. If your time involves taking personal calls, surfing the Internet or running a side business and you are not focused on your primary business, your team will do the same.
EARN RESPECT
Time embezzlement is the greatest loss to the majority of businesses. General Norman Schwarzkopf said, “You don’t have to be loved to be a leader, but you do need to be respected. Respect must be earned. To be respected, you must give respect.”
Set your office policy on cell phone and Internet usage during office hours, and then abide by it yourself. An employee who embezzles by spending time on the phone or Internet hurts your bottom line and negatively affects the entire business. Resentment will build among the employees who are working hard, and with it you’ll see lower morale and loss of production.
Don’t be immediately suspicious of your team, but know that there are steps you can take to reduce your risk. Consider these steps a positive focus. You will become a better manager when you take these steps. You’ll protect your assets and enjoy more profit, which you can then share with your team in rewards, bonuses and increased pay.
