How employee theft can manifest in surprising ways – and what to do about it
“Clever!” I thought.
A colleague of mine was relaying how her client’s bookkeeper stole hundreds of thousands of dollars from the owners. This theft went undetected for months until the government called looking for their payroll taxes.
That business went under because of the theft, and the owners were in financial ruins.
I sat there shaking my head in disbelief, but knew that scenario (and many others like it) play out in businesses every single day.
But you know what? It’s totally preventable. And many of the measures that stop it are SO simple.
It goes without saying that it takes a certain kind of person to steal from their employer. Sometimes it begins with a small theft due to the person’s financial hardship, or sometimes it’s done by someone who has worked the system before and is a professional that bounces from company to company doing the same thing undetected … or at least un-convicted.
Here’s a simple fix: Separate duties. Got it? It is SO simple, but so few do it!
There are many ways employees can get their hands into the cookie jar of your business’ money, but here are some creative ways they can do it:
Changing the payee name on printed checks: I bet you didn’t know that in QuickBooks, you can have a vendor name be one thing, and the name printed on the check be something else. All reports will show up with the vendor name, so it is very simple for someone to write a check to the “Phone company” with a payee of “Mary Smith.”
If Mary has the signature stamp for the owner, she’ll laugh her way to the bank. The same thing can happen with your online banking. It’s important to make sure that you audit your checks by looking at the images online of checks that were cashed and make sure you recognize all the vendors.
Payroll changes: It’s amazing to us how much leverage people give to their payroll administrator and never follow up on changes made to payroll. Without two-step authorization, it is easy to add fake employees to payroll, or payroll administrators can give themselves or a buddy a raise without you even knowing it. All they need to do is make an adjustment to their pay or set up the direct deposit into their personal account.
Fake vendors: Much like Mary’s check fraud scheme, creating and using fake vendors is another insidious way that employees can steal from you. It’s incredibly easy for an employee, especially one in charge of accounts payable, to create an LLC or S-corporation with a similar name to a real vendor. In order to avoid detection, they may even set up the corporation in the name of a spouse, friend, or relative.
Some go as far as to open up a PO-box for the company in order to appear more legitimate. That’s why it’s always important to keep a tight watch over your payables.
Write-offs, voids, or deleted invoices: In many companies, there aren’t enough people to split the billing and receivables process, which opens the door for a rogue employee to take the customer’s payment, co-sign and deposit it into their personal account, and write off, delete, or void the customer’s invoices.
Customers and bookkeepers could also cut a deal where you provide the service and the bookkeeper gets paid. You need to establish a process where write-offs need to go through you, in addition to spot checking your audit trail in your accounting system to see what has changed.
Burying unknown expenses: It’s easy to bury small expenses in different categories, whether it is done intentionally or not. Sometimes bookkeepers book the same expense in different accounts each month, and if they are small enough, they fall under the radar and don’t get noticed.
This might not be a big deal initially, but it if you want to understand your total spend on a line item on your P&L, it becomes important. This is also where fraud occurs.
Bookkeepers can slip in personal expenses and bury them in big expense categories so they go unnoticed, or change the vendors in the system to look legitimate. Ask your bookkeeper to run you a transaction report for each line on your P&L so you can see where the same expenses may be hitting different accounts, and make sure you understand and authorize every new vendor being added, as well as check the images of cleared checks to ensure the payees are those you recognize.
Why are these kinds of fraud so common?
The examples above show just a few of the many ‘creative’ ways that employees can find to siphon your cash. But why is fraud so common? Many reasons, but mainly because workers who want to commit fraud think they can get away with it. And, for the most part, they’re right.
In addition to the basic suggestion that companies segregate their accounting functions, it’s also important that one or more of the people involved aren’t just ‘rubber-stamping’ their part of the process. For example, if three employees are responsible for reviewing your finances, but two of them are too careless (or too trusting) to ask or double-check when something looks off, it’s no better than if one employee was doing it.
Plus, make sure workers know that you’ll see when something is up. For example, have your bank statements sent directly to your home – and tell employees you’ll be checking them. While you shouldn’t spend hours going through paperwork, just the fact that your employees know you’re looking around sometimes could easily be enough to scare them away from stealing your hard-earned cash.
Profit Point Consulting’s mission is to accelerate the growth of small and medium-sized companies through sound, strategic advice, and proactive financial management. If you need a trusted advisor to help develop and execute your vision, call us at (973) 659-1430 or fill out our contact form.