The recent news of a local bookkeeper who has been sentenced to prison for fraud set me thinking about the risks that all business owners run when putting their trust in their bookkeepers and others with access and control over their money.
A bit of browsing around the web revealed that in the USA, there is a professional body devoted just to fraud prevention (www.acfe.com). One of their recent reports identified these “red-flag” common characteristics of employees who commit fraud:
• they are male between age 31 and 45
• they have a degree-level education
• they have control issues and are unwilling to share duties
• they are extremely trusted and perform multiple roles within the business (i.e. the “trusted bookkeeper”)
• they do not take long vacations, or do not take their full year’s allotment of vacation time for many years in a row
• they have financial difficulties and/or are living beyond their means
• they have a problem with drugs, alcohol or gambling, and
• they are guarded and unwilling to allow their work papers to be reviewed.
Avoiding the “trusted bookkeeper” scenario is crucially important, using a strong system of internal controls such as:
• segregation of duties in cash receipts and cash disbursements, eg a small business owner should ensure that the requisition, approval and processing of all cash disbursement transactions are not performed by the same individual.
• restricting and monitoring user access to the accounting systems via passwords and user activity logs
• make sure access to online banking is strictly controlled- ask your bank manager to confirm you are taking advantage of all possible fraud controls
• ensuring that the person responsible for recording vendor transactions cannot also edit or manipulate vendor lists is an important control that should be in place in every organization.
• for cash receipts, remittances should be opened by a cashier in the presence of a responsible officer and cash and cheques should be kept in a locked and secure area until they can be deposited.
• use of budgeting is not only a great planning tool for measuring actual results with forecasts, but unusual variances in business activity also provide a red flag which may require follow up inquiry.
When introducing further controls, it is vitally important to make the bookkeeper aware that they are not being singled out as suspects – these controls are needed to demonstrate that the directors are fulfilling the duty to protect the company’s assets and all stakeholders.
The test I often use for myself when I am in a situation that requires judgement about how much to trust someone is:
“if I were having to explain my actions in a courtroom, would those actions be judged to be prudent and reasonable by impartial judges and jurors?”
If you can’t answer Yes, then think again about what you are doing
Please post a comment with your thoughts on this, and any advice you have to add based on your own experience.