Employee Theft & Financial Controls

One morning you get a call from a lawyer. After introducing himself, he says, “Your controller won’t be in today. You’ll find that $200,000 is missing from your bank account.”

You’ve just signed a letter of intent to sell the company and the books were about to be audited. Your heart sinks. Will sale blow up? Then your emotions rise up. “I trusted him for five years. He knows my family; he was at my wedding. How can it happen?”

The first thing to realize is, it did happen. No way to get around that. There is no question that you’ll be able to prosecute, and perhaps get the money back. But what have you learned?

The big take-away is that financial controls, oversight, and checkpoints are not optional. From day 1, these must be in place on all financial activities.

There are numerous easy ways a controller, bookkeeper, or accountant can steal, if there are not separate pairs of eyes overseeing transactions. Here are five real examples:

• The controller goes to a department store, makes a personal purchase and says it was business.

• They buy airplane tickets, but they are for their own family, not employees.

• In the accounting system, they code expenses as Fed Ex when they were actually salon treatments.

• They misreport cash and blatantly write checks.

• They create fake invoices from phony suppliers, then pay those suppliers, but the checks go themselves.

We could go on, but you get the picture.

What’s the Remedy?

The CEO must look at bank statements and detailed transactions on a monthly basis, comparing the accounting transactions with the bank transactions. This includes doing a quick scan of the “payable to” portion of checks and credit card transactions.

An outside person should close the books each month.

There needs to be a two-step process for paying invoices: the CEO approves, and then the financial person pays.

There should be a regular (once a year at a minimum) review of the books by an outside auditor, who is neither the person who keeps the books, nor the one who does the close. As your company grows and the finances warrant, you can also pay for a proper audit.

None of this will guarantee that there is no theft, but you make it more difficult to hide in the shadows of neglect.

Fraud IQ

If you'd like to check how well you understand the subtleties of fraud, try this very helpful quiz on fraud from the Journal of Accountancy.