Is Your Team Draining Your Bank Account?

Recently I read an article about the Controller of a small town who stole $30MM from the town over a number of years. It reminded me that I had once caught an Accounts Payable clerk stealing money from the company I worked for.

Point being, embezzlement happens more frequently than you might imagine and often it’s not large corporations that are the victims, but medium- and small-sized companies.  And while large corporations that receive audits every year still have embezzlements (like this one), smaller organizations that do not receive an audit are particularly susceptible.

I am not suggesting that it is cost effective for every small company to have an audit.  What I am saying is that every business owner and non-profit executive director needs to know how to avoid being robbed blind.  And the finance committee of the board, both for profit or non-profits, should be asking about the controls in place to prevent this type of activity.

“How Could We Miss This?”

Countless people asked the Mayor of the town how such a staggering loss could have gone undetected and, in truth, there were signs that might have led a shrewder leader to investigate much sooner.

For example, the Controller’s lifestyle was far more luxurious than her annual income of $80K could have provided. She had a $2.1M home, a horse farm and exquisite jewelry. Yet many, including the mayor, just assumed it was all funded by her horse business.

They never even considered the fact that she also had access to the town’s (former) stash of cash.

Clearly, one reason embezzlement goes undetected is that those around the embezzler rationalize the evidence and don’t ask enough questions.

It’s understandable – we all feel nervous asking personal questions and, as a result, we stay out of each other’s business to our own detriment.

Another reason corporate thievery is missed is because the thief is often extremely trusted. Yet, it’s often the most loyal and long-time employees who embezzle. The ones who never take a vacation and who are relied upon to handle the owner’s personal business.

These thieves are considered to be so trustworthy that they are the only one handling the books.

Big mistake.

But here’s the worst part: Even when an embezzler is caught, many companies decide it isn’t worth the expense to prosecute, and so culprits are free to repeat their behavior elsewhere.

What are the Warning Signs of Embezzlement? 

Savvy business owners need to be on guard against embezzlement 24/7. Here’s what to look for:

• Employees with a Big Life: Keep your eye on employees whose lifestyle is extravagant beyond reason.
• Employees with No Life: Employees who never take a vacation may seem loyal, but they’re really afraid of someone digging around while they’re gone.
• Employees with Too Much Control: Look for employees who have sole responsibility for the company’s finances.

How Can You Mitigate Your Risk of Being Robbed? 

Now that you know what to look for, here’s how to prevent embezzlement from ever occurring at your company:

• Do Homework: Run a background check on every employee with financial responsibility. Note however, that background checks will only pick up those embezzlers that have a formal record.
• Divvy Up Work: If only one person is responsible for the books, you must incorporate adequate checks and balances and separation of functions to ensure that only one person has access to all of the books and records.
• Lock Up Cash from Customers: Rather than having customers send payments directly to your office, use a bank lockbox. If a lockbox isn’t feasible, make sure the person receiving money is not the same person recording transactions. If cash is involved, incentivize your customers to ask for a receipt.
• Be First to Look at Bank statements: Make sure the company bank statements come straight to you, the business owner, for review.
• Let Someone Else Reconcile: Have a different employee reconcile the bank account after statement review from the person who is receiving and depositing money.
• Make Staff Go Away: Require mandatory vacations for all employees.
• Look for Unlikely Luxury: Carefully monitor employees who have lifestyle inconsistencies.
• Don’t Ignore Input. Pay attention to advice from your accountant or outsourced CFO. If they think there’s reason to take action toward mitigating risk, listen.

I would never tell business leaders not to put trust in their team members. But what I am suggesting is that you verify that the trust you have in your team is deserved by putting practices, processes and systems in place that allow you keep a watchful eye as part of a normal course of business. And that, as a board member of non-profits, you are asking the appropriate questions.