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Controls Are Key To Retaining Cash

Sep 16, 2009

A recent newspaper column I published discussed several situations where employees had successfully executed an embezzlement operation where B2B CFO Partners had been involved in the discovery of the scheme.  Sometimes the offending employee had fled the scene and sometimes the person was caught with a variety of actions taken in response.  In effect, these companies tried to close the door after the damage had been done.  Often, the actions were only partially effective and left the controls of their company in less than ideal shape, despite the warnings of our Partners.


I was really struck by the story of one client.  This particular business owner distributed produce to local restaurants.  The owner’s outside accountants several times brought up the company’s control weakness that one person was depositing cash receipts, writing checks and performing bank account reconciliations, all without any review or oversight.  The owners never acted on it, stating it was a waste of money to “bring in two people to do one person’s job”.  Unfortunately, this employee was stealing large amounts of cash.  When the Partner was called in for other work, this employee fled an amount determined to be over $400,000 stolen in one year with indeterminate amounts from prior years.


This highlights a habitual practice in small businesses of looking at efficiency as having the least amount people employed and combining roles as much as possible.  This is equivalent to saving costs by not putting locks on the building’s doors or not buying insurance on the company’s assets.


If you as an owner do nothing else:


·        Make sure you do not have the same person creating invoices as collecting cash.  This creates too easy an opportunity to issue credits or incorrect invoices and pocket the difference.

·        Make sure the employee who collects cash is not the person who reconciles the bank account.  Again, it is too easy to short a deposit and create an incorrect bank account reconciliation.

·        Make sure the person ordering inventory and supplies does not have the authority to approve payment of invoices and cannot approve purchase orders on their own.  Too many times vendors will cooperate with purchasing people to defraud companies.  This is just too easy to do.

·        Finally, if your deposits do not go into a lock box at your bank, seriously consider why not.  If funds go directly to the bank without employees touching them, it is one less opportunity to experience occupational fraud.



In closing have an expert look at your controls and implement sensible ones.  Management review of internal controls is one of the most ineffective controls to prevent fraud, but implementing steps that work is the best insurance to reduce the incidence and size of fraud.  Try your best to split up or even outsource key risk functions.  Even partners in a business have been found to steal from their other partners.


John Williams can help you do this.  He is a Partner in B2B CFO Partners, a nationwide executive services firm assisting emerging and mid-market enterprises.  He can be reached at 757-344-7462 or at jwilliams@b2bcfo.com.


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