3 Things to do now to Reduce Risk of Embezzlement

Having a bookkeeper to manage the books for your small business is a great thing. It frees you to focus on your business. However, just because you have someone handling the books for you doesn’t mean that you shouldn’t be involved. 

Bookkeepers can and do embezzle money from their employers. Too often embezzlement happens because the small business owner doesn’t have proper checks and balances (in accounting parlance: internal controls).

Here are three simple things you can do to reduce the risk of embezzlement:

Segregate the bookkeeping / accounting duties

Just because you have an in-house bookkeeper, doesn’t mean that you, the small business owner, is relieved of your accounting duties. Proper internal controls help reduce the risk of embezzlement. One aspect of internal controls requires a segregation of duties between incompatible bookkeeping/accounting functions. 

For example, having the bookkeeper generating sales invoices, recording the receipt of customer checks and reconciling the bank statements are incompatible accounting functions. These tasks put the bookkeeper in the position to steal customer checks and conceal the wrongdoing through the bank reconciliations. 

Typically you want to segregate duties that have the following components:

1. Authorization
2. Recording
3. Reconciliation
4. Monitoring

Most small businesses don’t have multiple accounting personnel to implement proper segregation of duties. One simple tactic is to review the bookkeeper’s work on the monthly bank reconciliations. (I know, you hired an in-house bookkeeper, so you don’t have to do this stuff — maybe hiring an in-house bookkeeper is not such a great idea.)

In reviewing the monthly bank reconciliation, start at a high level (e.g. consider totals only and ask whether amounts look “reasonable”) and drill into the details only when something doesn’t seem right. 

1. Are total deposits reported in the bank statement matching up total checks received from customers?
2. Are total disbursement reported on the bank statements matching up with total checks written during the month?
3. Are there any outstanding checks that have been outstanding for more than one month? Vendors don’t typically hold on to checks for very long before depositing them.
4. Are there any deposits in transit that are older than one week? You should be depositing customer checks daily. 

It’s normal to have timing differences between when the bank statement and your accounting records. The key is not knowing what “normal” is.

Make the bookkeeper take vacations

Regardless of how many people are working in your accounting department, it's essential that everyone at some point during the year takes a vacation. Requiring employees that work with sensitive materials take a vacation, will allow issues to surface to the top. These issues may or may not be intentional, but the fill-in person will be able to bring these issues to your attention allowing you to deal with the situation before your regular bookkeeper comes back.

Leveraging Outsourcing

One of the most effective ways to limit your risk of embezzlement is to look towards an outsourced provider for your accounting and bookkeeping needs. Working with an experienced outsourced accounting firm can eliminate the risk associated with a lack of internal controls and ensures that every transaction is reviewed multiple times for accuracy.

Here, at Basis 365, our staff possess years of accounting and bookkeeping experience, which will allow them to raise a flag and follow up on irregularities as soon as they arise.  

After you've considered all your options, take a look at what we have to offer, and contact our expert team for a consultation.

Photo by Alice Pasqual on Unsplash