They
recount the dreadful details of business owners who learned – too late – that a
lack of basic controls left their companies vulnerable to pilferage,
embezzlement, and other types of misappropriation.
How
do these lessons apply to small businesses? After all, small firms generally
can't afford to hire internal auditors or set up separate divisions to break up
incompatible duties. While it's true that a small company can't always protect
itself in ways larger firms might, management can establish controls in certain
high-risk areas, such as the following:
Cash
disbursements. If at all possible, the owner/manager should sign checks. This
control has a dual purpose: management sees how the company is spending its
money, and the cash disbursement function is kept separate from bookkeeping or
accounting. If the same person signs checks and enters disbursement
transactions in the accounting records, embezzlement is harder to prevent.
Requiring two signatures on checks above a certain amount also provides greater
control.
Customer
collections. Consider having the owner/manager open the mail, especially if
customer collections are a regular part of your business. Alternatively, you
might ask someone separate from the accounting function to open the mail and
prepare the deposit slip. Of course, the practice of making daily deposits is
also a good control.
Personnel
practices. By taking care to perform background checks before hiring key
employees, especially those who will be handling cash or other high-risk
assets, you can prevent problems later on. Of course, financial pressures,
addictions, and other factors can corrupt even good employees. That's why managers
might consider discreetly monitoring employee lifestyles (without invading
anyone's privacy, of course). An observant manager might note that certain
lower-level employees are living well beyond their means, or that warehouse
staff are carrying off company materials to remodel personal residences.
Perhaps
a small business's greatest control is the "tone at the top." If
management sets a high standard, employees generally follow. However, if a
manager is perceived as lax – for example, he or she doesn't respond quickly
when evidence of misappropriation surfaces – employees might conclude that
theft isn't such a big deal.
Remember
this: A company that fails to establish minimum controls is providing a golden
opportunity for fraud. If you'd like help reviewing your firm's controls, give
us a call at (518) 798-3330.
