Stopping embezzlement in audit trail.
When I present The 90-Minute MBA® in a seminar, I ask those who are business owners or managers to raise their hands. Then, I quickly count how many hands are raised and I ask them to raise their hands again if they “are currently being embezzled.”
In larger groups, there is always at least one hand raised. When the rest of the group notices, there is often a quiet rumbling of sympathetic comments. Before the noise dies down, I offer a surprising statistic. “Research by the American Institute of Banking suggests that on any given day, one business in four is being embezzled.” After doing a quick calculation, I tell my audience, “That means in this group there are probably X number of you (25 percent of the total) who are being embezzled today.” Then, pointing to the one (or more) who raised their hands, I add, “And they are the only ones who know.”
In real life, we are all faced with times when we just don’t have all the money we need. I’m not talking about the “need” for a luxury car or a vacation in Europe. I’m talking about just getting by, living from paycheck to paycheck. If a list of unexpected bills were to sneak up on you all at the same time, there wouldn’t be enough money. What happens if your 12-year-old needs glasses; the water heater rusts out; the car needs a transmission; and you need to fly to Phoenix for Aunt Mary’s funeral? There are times when all of us need more money than we can get our hands on.
You’re desperate, but you have an untapped resource. You could slip a thousand dollars out of your employer’s checking account and no one would notice. You write the checks, you do the bookkeeping, and the bank reconciliation. Besides, you’re sure you can pay it back before anyone notices. What’s wrong with a quick loan? Before you can pay anything back, you need new tires and you “borrow” more. Before long you have taken $100,000.
This embezzler did not start out with the intention of making our business fail. Typical embezzlers are just desperate and settle on the only solution they have. In most cases, an embezzler was totally trustworthy before that first dishonest act. After that, they changed. They were hard to work with. They seemed cranky. They weren’t involved in things the way they used to be, even though they worked lots of late hours (to cover their trail).
So, how do they get money out of your business? They get creative and then cleverly cover their tracks. That’s the general strategy. In an oft-repeated scenario, the accounts payable clerk creates a phony invoice from a real or nonexistent vendor and then pays the bill. The check (possibly made to “Cash”) is pocketed by the clerk.
It used to be that the actual check would be returned in the mail with the bank statement. Now, banks are pushing “electronic statements,” which may or may not include a scanned copy of checks. A clever embezzler should change to electronic statements.
In a variation of this, the accountant writes a check to himself for $10,000. Then, he uses the accounting system to cover his trail by changing the amount paid earlier to a legitimate vendor to include the embezzled $10,000. To accomplish this, he only has to alter the transaction recorded in the accounting software. Once again, there is no trail to follow if you don’t review the bank statement personally.
Now, let’s deal with solutions. First, when the mail is received, have someone OTHER than the bookkeeper open it, make copies of the checks, prepare and do the actual bank deposit. This separates accountant from the money. Second, require two signatures on all checks, even the small ones. One should be you and someone OTHER than the bookkeeper. Third, review your bank statement, whether it is online or not. Look for checks to people you don’t recognize or amounts that seem to be “off,” even checks for petty cash.
What about your accounting software? The solution is to have software that does not allow anyone to alter source transactions. Once a transaction has been completed, it should be permanently protected by what professionals call an “audit trail.” When corrections are made, they have to be done by creating “correcting” entries, not by altering the original transaction.
Unfortunately, the most popular “accounting” programs allow individuals to turn off the audit trail (if there is one), so they can alter transactions whenever they please. What a wonderful tool for embezzlers! Who else but the bookkeeper will likely have control of the accounting software and who else will use it to cover their tracks? Get rid of that software immediately. Get real job cost accounting software, something with a bulletproof audit trail. We offer our job costing software as an example of what good software accounting should do, JobView creates an audit trail that should be enough to discourage embezzlement. Again, the best safety net is to personally review your bank statement for things that are “wrong.”
There is no way to prevent every incidence of embezzlement, but using these simple precautions can reduce your risk. One day, it may be the difference between being profitable and being bankrupt. ■
About The Author:
Arnold S. Grundvig, Jr. is the author and seminar director of The 90-Minute MBA®, a business management book and seminar that presents the accumulated knowledge and insights of thousands of small business owners. Grundvig is a specialist in “turnaround” management. He is the owner of A-Systems Corporation, where the first job cost accounting software for the PC was created in 1978. For more questions and answers about embezzlement, email
Modern Contractor Solutions, June 2013
Did you enjoy this article?
Subscribe to the FREE Digital Edition of Modern Contractor Solutions magazine.