Are checks and balances in place to prevent office theft?
We have all heard the stories. This company, or that one, had unbelievable amounts of money stolen by trusted office employees.
Sometimes it’s less than a thousand dollars, however, often, it’s large sums of money, at times in excess of a million! Sound impossible? It’s not. Just this past week, while working with a client, he shared a story of a local business owner that had more than a million dollars taken from the business over a period of a couple years.
I worked with a large mechanical company where the office manager took in excess of a million dollars by simply telling the owner cash flow was tight and they needed to make a draw on its line of credit. In his case there were no checks and balances in place. The owner was busy running the company and cash flow always is an issue when doing large commercial jobs, right? No red flags were raised! They still were making money, just not very much. One day the owner’s wife came to the office and asked the office manager to see the checkbook. She refused and the rest is history.
The irony is this: Many cases of theft involve long-term employees who earn the respect and confidence of the owner. The result? Few, if any, checks and balances are put in place. The owner “trusted” his or her staff so there was no real need to put checks and balances in place — right? Wrong!
What do we mean by checks and balances? It simply means not allowing one individual to have total responsibility for any area of your business without someone else providing oversight.
Checks and balances must be put in place for the protection of the company as well as the employees. This month we are going to start looking at suggestions to prevent office theft with Part 2 on office theft available in the December eBook. In January, we will look at some checks and balances for other areas of the business involving equipment, materials, tools, etc.
To be honest, much of what will be shared is pretty much commonsense. However, even commonsense often is ignored if we put too much trust in the individuals handling the money. Give some thought to the following:
Never allow the same person that receives the money to also be the one depositing it. Most offices have someone that is the collection point for cash/checks received from technicians and/or salespeople. Once the deposit is prepared, have someone else make the physical deposit.
Provide the owner, on a daily basis, a physical list of all deposits made and credit cards charged. This works a bit like GPS vehicle tracking. Just knowing someone else is watching provides a degree of accountability and safety. A side benefit is the owner becomes aware of what money is coming and not coming in. Bottom line, it helps the owner become at least indirectly aware of the status of receivables.
Monitor use of the lines of credit. A line of credit is critical for any business. However, a true line of credit has one purpose and one purpose only. It is to be used for short-term borrowing against receivables. If a large payment is past due, the line of credit is drawn on to take care of payroll, overhead, etc. However, when the money comes in, the line of credit is to be paid back. That is how it is supposed to work. If it is being used to purchase equipment, inventory or anything else, it’s a red flag. The owner or manager should approve any draws on the company’s lines of credit with a full explanation on why it’s needed.
Review the P/L statement monthly. Most owners have a “sense” of how things are going. Once a month have a staff meeting (even if it’s just you and the bookkeeper) to review the P/L statement, payables and receivables. If it “seems” as if the company is making money, but you don’t see it in the checkbook, it’s time to dig a bit deeper.
Meet with your CPA once a month. Your CPA should be like a partner in your company. This outside person should be trained to spot irregularities while being a source of ideas to maximize your company profits. To be honest with you, few CPAs understand business. They mostly are trained for taxes. Be aware of two things:
First, if they truly understand business, pay whatever they charge. They will make you money, not cost you money.
Second, if they are not constantly questioning numbers on your P/L statement and offering constructive suggestions, get another CPA.
Have an internal audit performed by someone other than your CPA. Guess how these various thefts are discovered? It’s when Uncle Sam sends someone to your office to audit your taxes. Yes, it’s a huge headache to be audited, but a positive side benefit is that any irregularities found will be uncovered in the process. Be proactive. Have an internal audit performed each year or at least every other year by someone other than your CPA. It’s expensive, but having large amounts of money stolen is expensive, too. Besides that, it will provide outstanding accountability and peace of mind should the company be audited by the IRS.
Create a budget and monitor it each month. Creating a month-by-month cash-flow budget will force the owner to understand what it costs to run the company. A budget also projects monthly profitability. Reviewing a budget vs. actual report each month will clearly summarize every dollar earned and every dollar spent. If the projected profit is not there, find out why!
Do not allow the same person that writes the checks to sign them. Ideally someone in accounting will physically write or print the checks and require the owner or manager to then sign them. It takes a bit of time each day, but it will make the owner fully aware of what money is being spent. Attach the invoice with it so the owner can immediately see what the money is being spent for.
We have just covered eight checks and balances to help prevent theft in the office. In the eBook column we will look at eight more suggestions you might want to put in place. Remember, the overall responsibility of the business rests squarely on the shoulders of the owner. It’s your money so keep a close eye on it! RJ 2.0