Preventing Financial Harm To Your Business — Some Procedural Changes

With spring on its way, the grass is turning green and a business owner’s thoughts turn to taxes.

I recently received a list of suggestions from Alan Zusman, a CPA based in Ojai.  His thoughts were so cogent that I thought I would pass them along.

In a small business environment, a single employee often manages the finances.   That could lead to problems, either through theft or embezzlement,  or through simple negligence.  Alan suggested that a  reorganization of duties that might prevent the type of problems that could lead your business into  financial disaster.

Related duties should be assigned to different people.  Certain accounting functions are designed to cross-reference each other for accuracy.  For example, create a system where different employees write check and sign checks.  Different employees would order and then pay or receive materials.  Different employees would handle/receive cash and record cash,  etc.   While this may seem duplicative to you,  such procedures can reveal inconsistencies in your records.

Reconcile and scrutinize your bank statements every month. This is a time-consuming task, but a bank statement can tell you a lot about your business if you review the information in a timely manner.  Examine checks and endorsements, track transactions between accounts, compare payroll checks with employee records and ask questions.

Always ask for proof before you sign a check or authorize a transaction.  When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly.  You should also verify the names of your vendors and your employees occasionally.  And remember to cancel supporting materials after signing a check.

Lock and protect your financial documents.  Keep blank checks and signature stamps secured, and deposit cash and checks daily.  It’s also important to secure fidelity bonds and insurance for all accounting and key personnel.

Know your employees and examine behavior changes.  Always verify employee references before hiring.  Also consider the need for background checks as appropriate, including credit reports, DMV checks and criminal searches.  Many “white collar” crimes go unreported and continue to be repeated.  Watch for trouble signs:  possible substance abuse, changes in lifestyle, living beyond means, and possessiveness of work.

I have had several clients come in with horror stories of a single employee, the company bookkeeper or accountant, embezzling hundreds of thousands of dollars  over several years, leading to the bankruptcy of the company.  If some of these procedures had been in place, such a disaster might have been avoided.

This is a summary of the detailed information distributed by Zusman & Associates this month.  Many  thanks to Alan for this excellent advice.