General Defalcation

When was the last time you considered your exposure to employee embezzlement and theft? Embezzlement deals with the misappropriation of a company's funds by bookkeeping and accounting personnel, and theft deals with the broadest area of inventory shrinkage due to employee theft.

There are usually two major factors that can cause an employee who has otherwise been an honest and trusted employee to suddenly become involved in an embezzlement or theft. The first is addiction, including gambling or involvement with drugs by either the employee or one of the employee's loved ones; the second is pressure created by an economic downturn.

Experience has shown that when a significant embezzlement or theft is discovered, it is usually a situation where the employee is a trusted person who has been with the company for an extended period of time. The employee has an exemplary record, is dedicated, and is considered to be a "company person." Additionally, if an employee did not have the implicit trust of the employer, the embezzlement or theft might not occur. The breakdown in internal control creates a situation where the dishonest employee can manipulate the system.

Typically, the employer is extremely busy and does not have time to get involved in the accounting department. Also, smaller companies may not have the staffing and/or financial expertise in place to ensure a strong system of internal control procedures. When you combine the previous factors with the employer's feeling of total trust in the employee, the situation can prove to be very dangerous.

Many businesspeople are not aware that the scope of a typical accounting engagement does not include specific services relating to the disclosure of employee fraud. It is of critical importance that every employer focus on his/her exposure to potential employee fraud. It is unfortunate that few businesspeople consider this potential for loss in their own operations. It is not until after such a theft is discovered that most employers become sensitive to their own exposure. It is imperative that every businessperson understand why employees commit fraud and what can be done to prevent employee embezzlement and theft.

Our firm can assist you in developing and implementing important internal controls that will help your company safeguard the integrity of your financial records while at the same time revealing discrepancies. Please email me or call me if you have any questions. I will be happy to assist you.

NOTE: This is NOT a free service.

General Internal Control Warning

How are you managing your business finances? Many business owners are discovering that their assets are not as well protected as they thought. This is especially true in small business environments where a single employee manages all the finances. Often there are no checks and balances to verify that transactions are accurate.

When proper, consistent procedures are not in place, employees can learn to manipulate the accounting system to their benefit. Whether they take money from the company or their mistakes are undiscovered, the end result can greatly impact your company's management discussions, financial reports, and tax filings.

Unfortunately, once your financial records have been altered, discovering problems is extremely difficult. Most standard accounting practices are not designed to uncover internal problems such as embezzlement.

Therefore, the best way to safeguard your company's assets is to recognize and improve weaknesses in your internal procedures. The following business practices can help you minimize potential internal control problems:

* Related duties should be assigned to different people.

Certain accounting functions are designed to cross-reference each other for accuracy, writing/signing checks, ordering/paying/receiving materials, handling cash/recording cash, etc. These procedures can reveal inconsistencies in your records in a timely manner.

* Reconcile and scrutinize your bank statements every month.

A bank statement can tell you a lot about your business if you review the information in a timely manner. You should examine checks and endorsements, track transactions between accounts, compare payroll checks with employee records, and ask questions.

* Always ask for proof before you sign a check or authorize a transaction.

When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly. You should also verify the names of your vendors and your employees occasionally. And remember to cancel supporting materials after signing a check.

* Lock and protect your valuables.

Keep blank checks and signature stamps secured, and deposit cash and checks daily. It's also important to secure fidelity bonds and insurance for all accounting and key personnel.

* Know your employees and examine behavioral changes.

Always verify employee references before hiring. Also, you should consider the need for conducting other background checks as appropriate, including but not limited to  the need for credit information, motor vehicle reports, and criminal searches. Many white-collar crimes go unreported and continue to be repeated. Watch for trouble signs: possible substance abuse, changes in lifestyle, living beyond means, possessiveness of work.

These internal controls can help you reveal many discrepancies as well as  recognize the excellent efforts of your staff. Our firm can help you develop and  implement any of these important internal controls. Please email or call me if you have any questions. I will be happy to assist you any way I can. (NOTE: This is NOT a free service.)