Trust, But Verify
Hiring a bookkeeper is an excellent way to help keep your finances organized, especially if you’re not that into managing money and balancing a checkbook. A bookkeeper who can keep track of income and pay bills is a valuable resource for a busy entrepreneur, enabling a business owner focus on his or her business instead of mundane tasks like keeping the lights on. Whether you’re managing a business or just trying to keep your checkbook balanced, a good bookkeeper can be a valuable investment.
In my experience, most people are honest, hard working and sincere. Unfortunately, there are occasionally exceptions, and they aren’t always obvious. Someone intent on theft will probably find a way to make it happen. However, there are things that can be done to help keep honest people honest, or at least make someone who’s merely desperate look elsewhere.
First you need to know some of the warning signs that an employee might turn bad. None of these are sure signs of trouble, but they can be red flags for extra attention.
Financial Difficulties. Frequently, an employee who is embezzling funds is under some kind of pressure or external stress. This could be excessive debt, gambling or drug habits, or simply living beyond their means. Whatever the underlying reason, the stress causes them to feel like they have no choice but to steal.
Changes in behavior. Someone struggling with drug, alcohol or gambling addictions may start acting differently at work. An underachiever who suddenly starts working overtime and weekends might just be turning around, or might be working on a something devious, too.
Desire for Control. Just because an employee offers to lighten the load and take on additional responsibilities does not mean they’re up to something bad. However, someone positioning themself to embezzle funds will need to be in control of the purse strings and in a position to control the business owner’s access to financial information.
Whether you’re running a small business or your own personal finances, you should also structure your operations to make embezzlement harder to accomplish or easier to detect.
Separate Responsibilities. In a larger organization, this is fairly straight forward. But in a typical small business, it’s much harder to accomplish, since everyone has to wear multiple hats.
Still, the person paying the bills should not also be the one reconciling bank statements. An employee in charge of depositing cash at the bank should not also be in charge of collecting funds from customers, since this can present a tempting opportunity to skim profits before they are booked.
Limit Access. Requiring a second signature on all checks is one way to reduce the opportunity to embezzle funds. You can also limit an employee’s access to a single bank account, limiting his or her ability to cause damage. Accounting software can also help you to limit employees’ access to certain transactions.
Audit and Review. As Ronald Reagan once said: “Trust, but verify.” A periodic audit is your last line of defense against fraud. If you must consolidate financial responsibilities in a single trusted employee, then insist on seeing reconciled financial reports. Ensure you understand income and expenses, and are provided copies of receipts for every payment made. This will help prevent employees from submitting fake expenses for reimbursement. Compare your financial records to bank statements to ensure that you can track money coming and going from your accounts, and that every distribution from your accounts ties to your financial records.
For individuals and families working with an assistant, bookkeeper or other fiduciary, the controls are very similar. Your bookkeeper can collect bills, print checks and balance your accounts while you actually sign the checks or authorize electronic payments. If you have to rely on someone to pay bills, make sure you get an accurate accounting at the end of each month. Hiring a bookkeeper is an excellent way to keep your finances organized, but these internal controls are important to keeping your finances secure.
Taking the time to put these controls in place – and follow them – can save you a great deal of heartache (and money) in the long run.
This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is Director/Chief Investment Officer with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Brooks can be reached at (858) 755-5166, or by email at brooks@bfadvisors.com. Brooks and his family live in Mission Hills.
Category: Business, feature, Local News
