Businesses must take steps to protect against misappropriation of funds
In the last year, there have been numerous embezzlements and defalcations reported, mostly involving small businesses. These can be prevented by a few simple low-cost controls.
One of the most important is separation of responsibilities of asset custody and record keeping for these assets. For example, someone other than the person who receives and disburses cash and writes checks should record these in the accounting records. Other essential controls include, but are not limited to:
1) Get approval of payments by the owner or another responsible person who does not write the checks or authorize credit card payments;
2) Obtain fidelity bonds to cover persons who have custody of assets;
3) Have the owner or other responsible person who does not write or record the checks review all documentation for payment before signing them;
4) Send invoices and bank statements along with cancelled checks or check copies directly to the owner or supervisor for review for authorized transactions, accuracy, and unusual items;
5) Require mandatory vacations for all employees because the “dedicated” employee who never takes a vacation may need to be working to cover up defalcations;
6) Conduct an annual audit, which includes a review of and testing the effectiveness of the accounting system and financial controls-by an independent Certified Public Accountant;
7) Have the owner conduct a periodic review of accounting records and financial controls with the assistance of his or her CPA if the owner is not familiar with these.
In almost every instance, the owner said “this person, who embezzled funds, was a loyal and dedicated employee and I never thought he or she would do that.” Lesson: Always be skeptical and periodically review the work of all employees. Another essential measure before a person is hired is a thorough criminal background check and discussion of their work with previous employers.
To prevent defalcations and embezzlements, an owner who does not have the knowledge to set up good accounting records and financial controls, should utilize the services of a CPA to implement them and then periodically review them and make sure they are enforced.
Unless the defalcations involve the collusion of two or more people, these measures will prevent or minimize defalcations and embezzlements.
The writer is a CPA.