Lisa owned a successful floral shop downtown. Or at least, she felt like her small business was successful. But for some reason, the financial status of the shop never quite lined up to how busy the business was. She worked hard and had a good pricing model for her products. She had even secured several large wedding accounts in the last 12 months. Terry, her accounting manager, was really great at his job and she trusted him completely. They checked in every once in awhile but Lisa empowered him to handle the finances and make decisions that would make things better.
Even so, for the last two years her business was always floating just above water. The bills were barely being paid and she couldn’t figure out what the problem was. One day, the bank called and asked Lisa to confirm who the payee was for the most recent check that was written. Confused, she looked at her books and told the bank to whom it was issued. After some investigating, she realized that Terry had been writing in the payee name after he deposited the funds into his own account. He had been regularly stealing from her company. In total, he walked away with $100,000 before Lisa realized it was happening.
Everyone thinks that fraud and embezzlement will never happen to them or their business. Unfortunately, it’s a more common occurrence than you might think.
According to Farmers Insurance, a 2018 study by the Association of Certified Fraud Examiners revealed the biggest victims of internal fraud are small businesses, with median losses totaling $200,000. More than 40 percent of fraud is traced to a lack of internal controls.
How Do You Know If Your Business Is A Victim of Fraud Or Embezzlement?
You may have a fraud or embezzlement issue and not even know it. There are a few red flags you can look for that may indicate money is being stolen from your company:
- Do you feel like your business is doing great, but you don’t have a lot of cash?
- Does your company seem busy, busy, busy, but you aren’t making a lot of money?
- Do your financial statements contradict your gut feeling that business is going well?
- Does your gut feeling tell you things are not going well but the financial statements look great?
- Are your accounting employees resistant to letting other people look at the financial statements or they never seem to go on vacation?
A yes to any of these questions is a red flag that your business may be the victim of fraud or embezzlement. The good news is that you can take steps now to stop the problem from continuing and set up basic internal controls to prevent it in the future.
Why Set Up Internal Controls?
Internal controls are policies and procedures that should be in place to ensure employees are not stealing from the company or lying about the financial status of the business. Implementing basic internal controls will reduce the likelihood of employee theft by simply making it more difficult to steal from you.
If you have a smaller company, you may be thinking, “I trust my accounting department. There is no way any of my team would steal from our business.” While you may trust them, in business you should never have to rely on trust (nor should you) because there is always a chance that people will take advantage of that trust, or find themselves in a personal situation they believe justifies their stealing. Setting up internal controls ensures you don’t have to run your business on trust.
How To Set Up Basic Internal Controls To Prevent Fraud And Embezzlement
There are many policies and procedures you can implement to prevent fraud and embezzlement at your company. Here are a few of the most basic internal controls that will assist in safeguarding your finances:
- Set up consistent management oversight.
The process of reviewing work being completed, reports being filed, and interactions between vendors, employees, and contractors, should be monitored regularly by the department or team lead. Taking an active role in overseeing procedures and doing reviews that make sense for your business allow you to catch things as they happen. It also tells your employees that someone is watching. - Ensure separation of duties when it comes to finances.
You don’t want to have one person in charge of your finances from beginning to end. For example, the person who authorized a transaction should be a different person than who records it in the general ledger. Then another person altogether should be the one to then disperse payment. Another example: the accounting department should not be the people collecting mail and depositing the checks. Incoming and outgoing access to checks should be separated from access to the general ledger. Separate these responsibilities to different people so no one person has complete control – they would have to collude with another person in order to commit fraud. - Restrict bonuses for employees who have access to the general ledger.
If you’d like to do bonuses for these people, their bonus should not be directly tied to the profitability of the company. You don’t want to incentivize them to lie about the financial health of the business. - As the business owner, you have to be involved in the company finances – no exceptions.
You should be reviewing changes made in payroll reports each pay period. For example, if a fictitious employee suddenly showed up on the payroll report, you would know about it immediately. You should also be the one signing checks made to vendors so you know exactly how much money is coming and going out of your business. Finally, bank statements should be sent to your home, not to your office. That way you know they haven’t been doctored. Read them thoroughly before handing copies over to your bookkeeper!
By setting up basic internal controls, the money you’ve invested stays yours. If you’d like additional support to set up basic internal controls to prevent fraud and embezzlement, or have questions about your business’s financial security, book a meeting with me here. We’d love to partner with you!
