Small Business Fraud: We Have A Situation Here

Over the last 30 years I have  investigated a few situations  where fraud was suspected.  However, my favorite story actually happened well before my CPA career.  I worked for a person who  verbally abused everyone around him, not the least of that, his wife.  She handled the books of his company.  Unbeknownst to him, she skimmed a little cash each month for many years.  One day, she took the kids, the money and disappeared.

Another situation occurred when I was speaking to a friend who owned a bakery.  Her bookkeeper worked there for fifteen years and never took a vacation or got sick.  She was also the only person that knew the accounts receivable.  I responded, “Sounds like a text-book example for fraud.”  My friend laughed.

One day the  bookkeeper abruptly quit leaving the accounts receivable ledgers in disarray.  The bookkeeper had been using funds from one customer to pay other customer’s balance because she had been embezzling funds for quite a long time.

I always have recommended that small business owners run their businesses instead of the other way around.  The risk in making this transition is that in relinquishing many aspects of the business like accounts receivable, inventory, accounts payable, and inventory control, may lead the owner to delegate control.

That is not the way to delegate.  Nobody should be given a task that does not have internal controls regardless if they are friends, family, or experts.  You should review your controls with a professional, however, here is a sample of a few areas:

1. Generally:
   1. Create an accounting procedures manual
   2. Used pre-numbered forms
   3. Limit access to certain areas
   4. Require vacations
   5. Separate record keeping
2. Cash on hand
   1. Have custodian responsibilities
   2. Require backup for any checks or cash spent
   3. The custodian should not have access to accounting records
3. Cash Receipts
   1. Have your bank call your cell phone anytime a check is to be cashed.
   2. Reconcile cash daily
   3. Separate cashier and accounting duties
4. Accounts Receivables
   1. Require all credit approvals
   2. Reconcile sales to inventory
   3. Separate sales, AR, recipts, billing, and shipping

This just scratches the surface.  There are many other areas that need controls, but this should give you an idea of how detailed your controls should be.  The survival of your business may depend on it someday.