Let the discerning get guidance – Proverbs 1:5b

“Be careful and you will save many men from the sin of robbing you.”

-E.W. Howe

Earlier, we looked at a number of ways money comes into your business and examples of how money can “leak” out, in other words be stolen.  Sometimes it happens by simply opening the door of opportunity by failing to have checks and balances in place.  Sometimes owners and managers graphically demonstrate to employees the open door by taking cash from the drawer and not demonstrating that they adhere to properly documenting the withdrawal.  Other examples were a single person being in control of the money all the way through.  And then there are fraud schemes and embezzlement.
This subject would not be complete without a discussion of some sources of help putting checks and balances in place, monitoring those checks and balances, and uncovering theft and embezzlement to protect your business from theft.
Prevention from the Top Down
In my most humble opinion, the key to preventing theft begins with the business owner.  The owner must be the lynchpin in seeing that their business operates with integrity, honesty, and expects the same from the employees.  That does not mean they must design or micromanage the process, but they must set forth the culture in their business for honesty and integrity to be the norm and they must be willing to take appropriate action if theft is discovered.
A good place to start is listing all areas of your business involving money and which employees are involved in the process, whether they are involved directly in the accounting or perhaps service technicians who collect money onsite when a job is finished.  Make it fun, write them down, draw stick figures and flow charts, heck, use colored pencils so it’s not a drudge.  Get employees to help you connect the dots .. James balances the register each night, takes it to the office, Sandra makes up the bank deposit and takes it to the bank.  Oops, Sandra also writes checks and reconciles the bank.  Ohhh, no one counts petty cash and checks receipts.  You’ll likely spot weaknesses just by drawing cartoons.
In an article entitled Six Strategies for Fraud Prevention in Your Business,1 Stephen Reed, CPA, PSA, CGMA emphasizes the need to implement internal controls and the importance of making sure employees are aware that these controls are in place and are being monitored.
Accountability should be discussed during the interview process, included in employee manuals, job descriptions, and visibly inspected.  The consequences of dishonest behavior should also be made clear.  There are template examples and companies that assist in writing employee manuals.
Consider your hiring process.  What are all positions in your business where employees handle money?  It’s a good idea to have background checks done.  Background checks can uncover people who move from state to state and embezzle money, people with police records, and all sorts of other issues that would not be desirable for employees handling money.
In a small business, one of the most challenging positions to fill is a bookkeeping position, particularly a part time bookkeeper.  Small business owners are very good at they do, but often know very little about the nitty gritty of bookkeeping.  And, on the other side of the coin, often people who call themselves bookkeepers and apply for a full charge bookkeeping position really don’t know what they don’t know.  A resume may show previous experience that looks good on paper, but someone knowledgeable of bookkeeping and accounting can ask just a few pointed questions, and it becomes obvious that the person has done lots of stuff, but has negligible knowledge about the ins and outs of what they did or why they did it.
You can engage a knowledgeable person to be a part of the interview process and help you determine the skill level appropriate for your business.  It may be a good idea to outsource some or all of your bookkeeping, depending on your type of business.  Or perhaps have someone come in monthly to do things like bank reconciliations and other more advanced procedures.
Take time to get to know your employees.  Care about them, learn about other things in their life outside of work.  An attitude shift can indicate internal issues that need to be addressed.  Are there new financial stresses that might make an otherwise honest employee consider looking for ways to steal?  Addressing things like this can go a long way toward prevention by caring.
Checks and Balances
There are a number of possible sources of help.  A good place to start is talking with your accountant or CPA.  Getting regular financial statements is a good idea.  Go over them with your accountant, let them help you spot possible areas of concern.  These are YOUR business’ statements, they aren’t rocket science.  You may need to learn a few new concepts, but the statements should make sense to you.  Ask questions, if something isn’t clear, ask again.  That’s music to an accountant’s ear when a client truly wants to understand their financial statements.
There are management companies and consultants who specialize in both setting up internal accounting controls and monitoring them.  Having someone outside your company come in on a regular or not so regular schedule, visible to your employees, to inspect adherence to the processes in place makes a real statement.
Nearly all the transactions involving money go through your bank.  We talked about submitting listings of checks you actually write to your bank as Positive Pay listings so the bank can only pay those specific checks.  See what methods of fraud detection and prevention measures your bank can help you implement.
Is your accounting software one that opens the door to embezzlement?  Most software has some level of user security and audit trails, but some make “cooking the books” as easy as falling off a log.
Really Looking Under the Covers
Again in Six Strategies for Fraud Prevention in Your Business,1 Stephen Reed talks about

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) who can help you in establishing antifraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations.

In cases of hard core fraud and embezzlement, you may need to engage a specialist trained in forensic accounting.
Sometimes simple processes can be put in place without calling in the cavalry.  Remember the internal accountant who had charged hundreds of thousands of personal charges on the company credit card and cooked the books for years to cover his tracks?  Remember the bookkeeper who had blank checks signed supposedly for payroll taxes then made them out to herself?  Someone in your company who is knowledgeable about your business yet independent of the accounting process could simply be assigned to open the credit card statements and scrutinize the charges and open the bank statements and look at the payees on check images in the bank statements.
Another simple strategy is to install security cameras and let employees know they are there.
Do I need an audit?
There are valid business reasons to have audited financial statements.  Sometimes banks require audited financials, some organizational bylaws require audits, however audits are not always the answer.  Audits can cost a lot of money and a full audit may not be what you need.  If you’re thinking about hiring an auditor, discuss the engagement with them first.  Be very up front about why you are considering having an audit and ask the auditor what procedures they will carry out.  Tell them what you want to accomplish, like verify my checks and balances, see if anyone is stealing, etc.  You may decide to have an “Agreed Upon Procedures” engagement where the auditor just does those procedures directly relating to your specific needs.  If you truly suspect fraud or embezzlement, a forensic analysis should be a strong consideration.
No solution is “one size fits all.”  It is my sincere hope that these two topics have been helpful in raising awareness that theft and fraud are real, and that small businesses are prime targets.  It’s heartbreaking when a longtime, trusted employee or even family member is the one stealing.   However, help is available for both prevention and detection.  Be a good asker of questions and listener for answers.  When selecting professionals to work with, make sure you can communicate well with them.  Be able to ask complicated questions, and get answers you can understand.  If that is not the case, keep looking until you find just the right people for your team.
Six Strategies for Fraud Prevention in Your Business1