(510) 545-2161 jeff@slbookkeeping.com

Streamline_Bookkeeping_Blog_fraudToo often we see companies that focus on 1. serving the client and 2. sales, but slack on management of the business. Here is a good article on the importance setting internal controls
and reducing the risk of fraud:



Q: Which internal accounting

controls can help prevent fraud?

A: This is a vast topic covered by
countless books and consultants, so let’s narrow it down to employee fraud and
theft. Aside from the obvious—conducting regular inventory checks and book
audits, reconciling cash daily, and personally reviewing financial statements
each month—there are several actions you can take to protect yourself and your

1. Establish a code of conduct.

Did you know that Walmart employees
are not allowed to accept a bottle of water or cup of coffee from a vendor at a
meeting without paying for it? That’s what I mean by a code of conduct. It’s a
statement that you will not tolerate unethical or illegal behavior toward
anyone—customers, suppliers, employees or the company itself.

While you may not be as strict as
Walmart, you should write and post a code of conduct that clearly spells out
the rules for employees and the repercussions for not following them. Give the
code to everyone upon hire, and periodically thereafter, and require written
acknowledgement that they have read, understand and agree to comply with it.

Now look in the mirror. It’s one
thing to demand honesty from your employees, but the code of conduct goes both
ways. So you, as the enforcer of the code, need to follow it to the letter. If
employees see you take home merchandise or use company property for personal
reasons, they may follow your lead—or worse. If you treat employees with
respect, compensate them appropriately and offer opportunities to advance their
careers, they’ll have less motivation to steal or cheat.

2. Set up organizational checks
and balances.

In a small business, one person may
wear many hats. But the most dangerous multitasker is a solitary
administrator/bookkeeper who opens the mail, handles deposits and payments and
files transaction documents. No one person should control that many aspects of
the business—it’s asking for trouble.

At one of my companies that
processed a high volume of mail, we convened a dozen senior managers and their
assistants to open the mail every day. With all those hands, the task took
about 15 minutes. All checks were set aside, with a tape of their total run.
When the day’s bank deposit was prepared, the total had to match the tape run

Also avoid assigning the same person
to handle purchasing and vendor payments, or allowing the same employee to
manage accounts payable and accounts receivable. If you’re a manufacturer or
distributor, you should have separate people managing receiving, warehousing
and shipping.

At the very least, set up an
operation in which one person controls what comes in (cash, checks,
merchandise, supplies) and another handles what goes out (payments, orders,
finished products).

3. Institute policies and

Someone other than the bookkeeper
should settle bank and credit card statements every month—and the person who
reconciles the bank statements should not have the ability to enter or modify
transactions in the accounting system.

Here’s why: One of my partners
started working with a new client and began routinely looking at their credit
card statements. For one card, there were no records of purchases that matched
the charges. An investigation uncovered that the client’s former controller had
taken a company card with him when he left and had run up more than $200,000.

Another way to rein in fraud is to
have payroll prepared and authorized by HR but entered by accounting, then
checked by management before the funds are sent to the payroll company.

Also, keep everything locked up that
should be locked up, and enforce rigorous key control and computer-system
access, especially for departing employees. Changing locks and passwords
company-wide when someone leaves or is dismissed is not an overreaction—it’s

4. Watch employees’ behavior.

If you notice changes in an
employee’s behavior—files have been misplaced; they don’t want help with a
project; they’re giving a customer excessive attention—look into it. The same
goes for an employee with access to critical parts of the company’s operations
or finances who never takes vacation time, or who routinely works early or late
when no one else is around.

Trust me, they’re not working those
extra hours because they love their job. It might be because they don’t want
anyone else to see what they’re doing. Insist that people use their vacation
time and stick to regular business hours.

Pay attention to any blips in your
operation, no matter how minor. At one manufacturing company I worked for, a
customer sent back an expensive item for warranty repair. We couldn’t find any
record of the sale. Upon further inquiry with the customer, we discovered that
our vice president of manufacturing and a foreman were building equipment
inside the company, then shipping units out the back door along with their own
company’s invoices. We were able to recover hundreds of thousands of dollars in
losses before turning the two over to the police.

The key in all this is to trust your
gut and recognize that no one knows your company as well as you do. If
something doesn’t look or feel right, it’s probably not. By all means,