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Trust Your Employees, but Verify Their Actions

by | Oct 13, 2017

Our team recently wrapped up another sizeable fraud examination for a small business whose trusted bookkeeper embezzled hundreds of thousands of dollars. While the names and the faces of fraud change, the story remains the same: the employee you least expect, the most trusted of them all, takes advantage of their position – and you – for their own personal gain.

Chances are, most of your employees would never dream of stealing from your organization. Honest people, however, have been driven to embezzle when faced with perceived overwhelming financial troubles. Perceived financial desperation, coupled with opportunity and constant temptation, increase the odds that even the most honest employee will succumb.

What do you think would happen if you scattered 1,000 one-dollar bills around your company’s break room with a sign that simply asked your employees not to steal? How long would it take for someone to give in to the rationalization that no one will miss just a couple of the one-dollar bills? It likely wouldn’t take long.

If most employees would steal under the right circumstances, how can you possibly prevent embezzlement? The answer begins with you.

Trust, but Verify

All too often, employers have a false sense of security and think they are immune to the risks of fraud, with thoughts like:

“My bookkeeper is the first one in and the last to leave.”

“They’ve been with me for years.”

“But I pay them so well. . .”

“Our accountant gives us a clean bill of health every year.”

Allow yourself to consider for a moment the opposite – that employee theft could happen to you. After all, according to the Association of Certified Fraud Examiners (ACFE), companies lose an estimated five percent of their annual revenue to fraud. Who at your company might have the opportunity to commit wrongdoing and is in a position to conceal it?

The first rule of thumb is to never leave someone in a position to check their own work. Think of a transaction like a circle: no single person should ever be allowed to complete the circle by themselves. You need to segregate duties, especially when it comes to bookkeeping.

Ask yourself these questions:

  • Who has access to the money coming in? Don’t leave them with the authority to post or edit customer transactions.
  • Who has access to the money going out? Don’t leave them in a position to create new vendors or employees – not to mention the authority to sign checks or execute bank transfers.
  • Who orders parts or services? Who opens the mail? Who takes the money to the bank? Who writes the checks? Who mails the checks? Who reconciles the bank statement?  I hope you are getting the picture.

Segregating duties in a small business isn’t always easy, but it can be done. One approach is to find a way to insert yourself into the process:

Cash receipts: Ideally, the employee collecting money and posting payments should not be the employee who bills customers. Only one employee? Don’t provide them with administrative rights to post credits, write-offs or void customer transactions. If you do, be sure to verify the electronic Audit Trail (an invaluable feature of QuickBooks, but most accounting programs have them). Stay informed.

Cash disbursements: When your bookkeeper is the only one able to disburse money and reconcile the bank statement, ensure that bank statements and cancelled checks are delivered to you – preferably to your home – and reviewed before providing them to your bookkeeper.

Debit or credit card purchases: Your bookkeeper is likely paying these bills. Don’t give them authority to increase limits or request additional cards. Place daily and monthly limits on cards and monitor them regularly. Receipts should be submitted and reviewed before the bill is paid.

Fraud is an unfortunate but all too real component of conducting business. By staying vigilant, segregating financial duties and verifying your employee’s actions, you can protect your business from embezzlement.


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