Want to hear a horror story? One of our members was “cash poor” for several years. Neither the owner nor his accountant could understand why the agency was so busy, the billings so good, and the bottom line so solid… but their cash position remained so poor. It seemed they were always looking for payroll money or dipping into their line of credit. On a hunch, the owner started more closely examining his bank statements. What he found made him sick. He was being embezzled.
“I never thought that this could happen to me; I didn’t know how to react,” he confided. “The realization that someone I knew, liked and trusted was stealing from me was overwhelming.” After talking with his accountant, he approached the bookkeeper and got a tearful confession. Want to know the amount? Brace yourself—over $300,000 in a five-year period! Not enough to put them out of business, but certainly enough that the agency was always running on the financial edge.
This owner experienced multiple losses: lost money, lost ease of mind, and he lost a significant player in the agency’s daily routine. This woman was very competent (ed. note: embezzlers often are among the most competent employees of a firm). She did a wonderful job with the payables and receivables. Plus she produced the financial statements on time, or never more than a day late. She worked a ton of overtime, and the truth is, the agency would not have known what to do without her.
How to Recover
This experience is one we hope no one else ever has to go through. The most important thing to learn from this owner’s experience is to never, NEVER! place as much blind faith in one person as this owner did. Make sure that you review your numbers weekly. Trust is one thing, but self-preservation and protecting your business require your attention and oversight to agency finances.
If embezzlement should happen in your agency, we have some advice:
Work out an agreement for repayment immediately. Have the embezzler sign a written confession and an interest-bearing note backdated to the first occurrence. Our owner quickly started this process and received over 10 percent of the money back in short order. The agency also improved their auditing techniques to such an extent that this will never happen again in their firm.
Try not to get involved in prosecuting and be careful of involving your bank. If that happens, and we realize that sometimes it is the only way, the IRS will enter the case immediately and try to collect income taxes from the embezzler on the stolen money. These taxes will be paid in front of any money returned to you. (We often wondered why more embezzlers are not prosecuted; now we know.)
Preventative Measures
Embezzlement is more common in small to midsize businesses than you may believe. Take a hard look at your agency finances. See what you come up with. In the meantime, consider these auditing techniques:
All mail and all correspondence from both the bank and governmental agencies should come to you UNOPENED. Review it all and only then route it to the bookkeeper.
Examine all bank statements. Look at every check and check the endorsement on the back.
Have one person make all deposits and another one do the posting to the ledger. Maintain a copy of all checks deposited. Unless there is collusion, this will help prevent someone from taking a client’s check and depositing it in their own account.
On a periodic basis, review the check register to see if there are any unusual voids or holes in the system.
Save all voided checks.
Keep a “little black book” in your desk that records the money recorded to your checking account and the total amount of checks you signed that day. Then, weekly, compare your figures with the checkbook.
Bond your employees. Bonding is a form of insurance guaranteeing a specified sum in damages in the event one or more bonded employees cause financial loss to the insured (the employer).
Your Accountant’s Role
You cannot depend upon your accountant to catch a thief in your business. Most accounting firms only get involved with your agency to compile year-end figures or to help you with tax planning. The daily routine—where the embezzlement is accomplished—happens in-house at the hands of your own people, so internal oversight is essential.
A way to involve your accountant and his knowledge about embezzlement and fraud is to have your books audited on a yearly basis. We hesitate recommend this, however, because of the cost involved.
There are three levels at which your accounting firm can complete work on your books for year-end purposes. First, there is compilation. This is the lowest form of engagement. The accounting firm simply takes the numbers you submit and produces an annual statement, much as you do on a monthly basis. Because of the incompleteness of this category of year-end review, your accounting firm will put a letter in the front of your annual statement that says they have done a compilation on your books and therefore cannot express an opinion on whether the numbers are right or wrong. If someone is stealing from you, the compilation will not show the discrepancies.
The next level is the review. The review statement is more thorough. The accounting firm once again accepts your numbers, but does a series of specific and random checks to confirm that the numbers you give them are accurate. Most accounting firms do a good job in spotting irregularities through the review process, but a smart embezzler still can finesse past a review.
The only way to be sure of your books at the end of each year is to have your accounting firm audit your records. One of the main reasons that embezzlers gravitate to smaller firms as bookkeepers is because they know that small firms will not go to the expense of a yearly audit. In an audit engagement, the accounting firm examines every accounting transaction to attest to its authenticity, ensuring that an audit will turn up any embezzlement. Because the accounting firm examines every transaction, they are willing to express an opinion regarding the state of your business.
Audits tend to be expensive and time consuming, but discuss costs with your accountant and if it seems affordable—and especially if you have concerns—budget for it. Otherwise, the review is probably enough to confirm how you’ve done, and to satisfy the bank; but please institute some of the safeguards mentioned above to protect your agency.
Whatever you do, be careful out there. This business is tough enough. Don’t allow it to be tougher than it has to be. You work hard for your money...
