by Lydia C. Jones, Georgia SBDC A significant cause of small business failure is theft—internal as opposed to shoplifting or other external activities. Although white-collar crime is often in the news, the reality is that on a less public scale a material percentage of theft cases occur inside small businesses. Business owners frequently contact accounting professionals after receiving a call from a bank with the bad news that the checking account is overdrawn ... or finding a few errors in internally produced financial reports ... or placating a vendor who has not been paid ... or hearing that the chief financial employee has resigned abruptly. Occurrences like these are obviously not always cause for worry. As a practical matter, however, these all too familiar scenarios are significant clues to those experienced and trained to recognize theft or other irregularities. Who's vulnerable? Theft is a problem to small business owners who like to entrust others with financial tasks. Beware: The price of "trust" can vary—even in businesses that one might least expect to be vulnerable: - Two attorneys have a small practice and share the costs for a bookkeeper. The attorneys are unsuspecting targets of the unscrupulous bookkeeper, who insists that she needs her paycheck early—on several occasions—to resolve urgent family problems. By year-end the bookkeeper has resigned to care for her ailing mother in another state and a tax preparer finds a real problem: the bookkeeper has overpaid herself $10,000 in just six months.
- A service firm trusts a long-time CFO who asserts for many years that a review or audit by a CPA firm is an unnecessary expense. After a change in personnel, a previously unrecorded liability in the amount of $250,000 is discovered and the cash to pay it is missing.
Seven steps to reduce the risk! All too often the excuse that "the books are in a bit of disarray" is indicative of far more serious problems. A few simple steps, however, can minimize the risk. - Ideally, one employee should disburse checks, another should deposit receipts, and another should reconcile bank statements.
- An owner, principal, or designated officer should sign all checks. Electronic transfers or direct deposits should require owner approval.
- An owner, principal, or a designated individual should receive all bank statements directly from the bank—unopened—for the purpose of reviewing payees, endorsements, and deposits. The owner should inquire about a relationship with the business of any regular or unknown vendor and about reasons for an unusually large payment to a vendor. Endorsements that are inconsistent with named payees as well as those that include additional-party transactions should require explanations. A review of deposits for timeliness, consistent amounts and familiar sources can reveal irregularities.
- An owner should receive all official notices, like those from the Internal Revenue Service, the State Department of Revenue, and others. A notice regarding late payment or failure to pay an agency requires immediate resolution.
- On a monthly basis the owner should review all bank reconciliations to make sure that they balance with published or generated financial statements.
- The owner should require specific monthly financial reports—including a balance sheet, income statement, cash flow, accounts receivable aging, and accounts payable aging—and review them for properly recorded transactions. Additionally, balances on aging reports should agree precisely with their respective balances on the balance sheet. Financial department personnel should explain any past due receivables ("Why hasn't this client paid?") or any old payables ("Why has this vendor not been paid?").
- The owner should require a review of the business records at year end, concurrent with completion of the annual tax return.
Professional help is available! Consultants with the SBDC Network can help a business owner evaluate internal controls and establish checkpoints to ensure accurate record keeping—practices to help avoid the possibility of serious irregularities that can lead to complete business failure. To obtain further assistance contact a consultant at a Small Business Development Center. > See also: Risk Management |
