Internal Controls

A few years ago someone close to me was having a lot of issues with a problematic employee.  This employee had gotten really difficult to deal with and become really unpleasant.  My friend resolved to have the unpleasant fix-it-or-go conversation when his employee blurted out, “I’ve been stealing from you for years”.  Now he knew where the attitude problem came from.  Stress from stealing.

But the problem was bigger than attitude obviously.  As he dug in with a hired CPA he discovered that the amount stolen from him was huge, and the covering of tracks by his employee very clever. The thefts didn’t bankrupt his business, but they did hurt it severely.  As it turned out, much of the thefts could have been prevented with some fairly simple internal controls.

Small businesses have trouble with segregation of duties.  Often they only have one bookkeeper who may perform those duties as one job of many.  Certainly most small companies don’t have multiple people in accounting.  So, they fail to segregate.

Here are some basics.  You need to segregate who agrees to buy things from the person who pays for them.  And you need to segregate who balances the check book from who writes the checks.  If this means the business owner has to be one of those people, or a part-time out-sourced service has to be used, that’s better than being stolen blind like my friend.

Another basic that gets ignored often is requiring people who deal with your money to take at least one full week off a year.  That means a total of nine days.  Being gone that long allows things to show up.  Not everything will, but it makes the job of covering tracks harder.

There are other prudent business practices everyone ought to engage in, but most do not.  Those who don’t are just an employee personal problem away from serious financial harm.  It’s worth asking your outside CPA for counsel on.