Evaluating Risk in Your Business

I received another interesting Google alert which reminds me how small business owners often take their business for granted.  This one was about how the bookkeeper managed to write almost 100 checks to himself over 3 years to the tune of almost $250,000.

Let me start by saying that the bookkeeper was wrong.  No ifs, ands, or buts about it.  But to be honest, the business owner provided the means and the opportunity.  That doesn’t excuse the behavior but the owner would have been $250,000 wealthier if he hadn’t failed in his responsibilities to set up his company to deter such poor behavior.

First, a small business owner should never, ever give the bookkeeper check signing authority.  There is no such thing as a good reason for this.  One of the most important rules to protect your cash is make sure that the person with direct oversight of the accounting system can not sign a check.

Yes, I know there are many good reasons to have a second signer and I think there probably should be at least one other.  But have it be your shop manager or construction foreman, not the bookkeeper!  Hell, have your cousin Bob be a signer so that when you are out of town he can come by the office and sign checks.

But you have to make sure that the second signer knows the rules.  The most important rule is that no check is signed unless all the paperwork is with it.  That means a purchase order (yes use those too), a vendor invoice, a receiving ticket (what? You don’t have anything to prove items were delivered?) all packages together so they can review it prior to signing.  Everything must match or they must not sign.  And the bookkeeper cannot pressure them for any reason.  As a matter of fact, they should call you immediately if they feel something is off.

I understand it is possible that someone could create lots of documents to support stealing but the reality is that it would take some advanced planning to pull it off.  Plus, once it was discovered (and it will be) it is pretty obvious they had real intention to steal from you and that it wasn’t merely a crime of opportunity (oh look a $1,000 bill lying on the ground, finders keepers).  But ultimately having someone who is not part of the accounting control system look things over might actually help you find new ways to do the work.

We are big fans of using automated workflows and online document management.  These can make the process of approvals easier, faster and far more reliable.  Properly constructed, your system wouldn’t even allow a check to be written until the work flow is complete.  You could have several different people review their parts and then you can be comfortable in knowing that whoever signs the check (or pushes the enter key for an ACH transaction) is doing so with proper authorization.

Here are a few other commonsense rules for vendor payment management:

  • Make sure that all vendors have filed a W9 and submitted their insurance documents
  • Create a receiving document to prove what was delivered and that it matched to the PO
  • Create PO’s for goods being purchased
  • Have a contract with professional service providers for every major project they do – no open-ended hourly billing
  • Have one of your employees call random vendors to verify their information to make sure they really exist and do business with you
  • Review your accounts receivable aging reports and personally follow up with customers who haven’t paid in 60 days.

These steps won’t stop a determined fraudster but they do substantially reduce opportunity.  And without opportunity, most fraud disappears.

If you are looking for an accounting firm who understands business and how to protect it, check out our website for more information and to contact us.  We look forward to the opportunity to be of service to you.

Have a great day and Happy New Year.

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