Bookkeeper and Employee Theft

I had a client who went through a very difficult period of time a number of years ago due to a bookkeeper (and a few other employees) who were literally robbing the business blind. The owner of the business had no idea what his bookkeeper was doing because he NEVER double checked any of her work. It was a small business – the owner and his wife, a bookkeeper, and 5 other employees. Here’s the story, as told to me by the business owner.

Crime # 1
The business owner (we will call him Jack) owned his business for about 20 years. He hired a new bookkeeper who was good at her job. So good in fact, that Jack felt he didn’t have to check her work after about one year. (We will call the bookkeeper Lisa.) 18 months after she started working for Jack, Lisa began to embezzle.

Jack had 5 employees whom he provided cell phones for, as well as one phone for himself, for a total of 6 cell phones. Lisa had a good friend who worked for a cell phone competitor. Between Lisa and this friend, they got another cell phone (similar to the ones used by Jack), and had this cell phone put on Jack’s business cell phone account. These charges were added for about 3 years before Jack accidentally stumbled onto the situation by accident. Lisa had left a recent cell bill on her desk and Jack saw the bill.

Jack immediately contacted the phone company regarding the 7th phone and was told he did not have authorization to remove it from the bill. The phone company did not believe that Jack was the owner of the company, or that he was the only person authorized to add or remove phones to his business account. This resulted in a 6-month battle between Jack and the phone company before Jack was able to have the additional phone removed.

Crime # 2
During the 6 month cell phone battle, Lisa convinced two other employees to help her steal products from the company. She would order 100 items of a product the company normally ordered, when the company only needed 50 or 60 items. The other employees would then receive the 50 or 60 items into the inventory, while the remaining items were placed in the employees vehicles (including Lisa’s) when the owner was not on the premises. With Lisa’s help, the employees would sell these products to Jack’s business customers at steeply discounted prices (often for less than what the product actually cost).

Jack’s Stand
Jack had noticed that during Lisa’s employment, business had been slowing down – that sales were not as high as they had been in previous years – but he never knew why. He trusted his bookkeeper, and his CPA never verified any work done by the bookkeeper either. Jack NEVER took inventory, or compared vendor invoices to items received.

Needless to say, Jack got wise to the bookkeeper as a result of the cell phone bill he found on her desk. He asked her on a weekly basis whether she had taken the additional phone off the bill (which she always said she would get to, but never did anything about). Jack finally fired Lisa and all other workers involved during that time. However, before he did, Lisa destroyed all evidence linking her to any embezzlement (including hard copies of invoices) and ALL computerized accounting records. She destroyed this information in such a way that there was no way to recover any of it. Because of this, Jack was unable to prosecute Lisa or prove anything else.

Moral of this story (especially for small business owners):

• NEVER trust all of your bookkeeping to be done by just one person without periodically checking the work yourself. As a business owner, you have every right (as well as the responsibility) to know how your business is doing financially. You have the right to see all vendor invoices and to check those invoices for accuracy. Furthermore, you should be the person who authorizes all payments to vendors (or to anyone else), including payroll for employees.

• If your business carries any kind of inventory, you should perform an annual inventory count. (This is required for income tax purposes anyway.) When you purchase products, you should periodically spot check the products that arrive with the vendor invoices and other shipping documentation to verify that you are receiving everything that was ordered.

• If your company receives services of any kind (cell phone service, etc.), periodically look at the vendor invoices to see what services you are being billed for. Sometimes vendors will charge you for services not properly authorized by you.

• Bookkeeper theft is not always easy to catch, but will never be caught if the business owner or other company officials NEVER check the work of the bookkeeper — especially in small business settings. Small businesses do not always have the ability to segregate duties in the “accounting” function of the business, so almost all work is done by one or two people, with no way to separate certain functions to other employees.