theft imageThere aren’t many tasks most business owners despise more than accounting. Most would simply prefer to watch money come in faster than it goes out and walk away. This is why many owners jump at the first opportunity to hire a bookkeeper and start delegating all accounting tasks to someone else.

It might be tempting to simply pass over the QuickBooks file, bank account access, and payroll records; wash your hands; and never look back. However, if you choose this path, you might as well literally give them your wallet and the keys to your home, too.

Most business owners are smarter than this, and they do keep an eye on bank statements, sign checks, and hire ethical bookkeepers. On the downside, however, employee theft by accountants is rampant. According to the 2012 Association of Fraud Examiners Report to the Nation (ACFE), a typical company loses 5 percent of its revenues to fraud every year. Even worse, the average loss of construction companies is $300,000 — the third highest of all industries.

So, what’s missing here?

Here are three common ways you’ve misplaced your trust in the accounting department:

1. Misplaced Trust in your Bookkeeper — Have you ever thought, “Fraud could never happen to our company because we have an ethical bookkeeper?”

There’s an old proverb, made popular by former President Ronald Reagan, that says, “Trust, but verify.” While someone or something may be considered reliable or trustworthy, you should still perform additional research and follow-up just to make sure.

We often think of ourselves as good judges of character. We typically only associate with people we trust and respect, and, certainly, we only hire ethical people. The problem with this thinking, however, is several fold. For one, our own judgment misguides us. Asking the candidate in a job interview whether he or she is ethical doesn’t usually help much. In fact, in only 6 percent of fraud cases, the criminal has a prior fraud-related conviction. People don’t tend to be ethical or not ethical; rather, people change.

Consider this: The once ethical bookkeeper you hired has changed. When life circumstances change because a spouse loses a job, medical bills stack up, or addictions enter a person’s life, financial pressures may cause him or her to look at all possibilities to alleviate the problem, including ‘borrowing’ from the company.

If you, as a business owner, create an opportunity for theft to this already financially pressured situation, your risk of fraud is extremely high. For example, ask yourself whether your bookkeeper could create a fake employee in the payroll process because you never look at the detailed payroll records. Or, could your bookkeeper steal an incoming check out of the mail and record a fake journal entry to cover his or her tracks? Does your bookkeeper have access to blank checks and the accounting system?

Here are four actions you can take to prevent fraud:

• Perform background and reference checks. Making a 10-minute phone call to previous employers is the best way to get honest feedback. Former managers are typically honest. It’s surprising what you may learn.

• Remind yourself regularly that even if you trust your employees, their activities must be monitored. Move past the notion that it can never happen to you, because it can.

• The threat of detection is the best method of prevention. Set a tone of integrity, honesty, and fairness at the company. Communicate with your employees that unethical actions are not tolerated and follow through on the threat when an employee gets out of line.

• Keep an eye out for warning signs. In 81 percent of fraud cases reviewed by the ACFE, there were behavioral warning signs that something was wrong. Common behavioral warning signs include employees living beyond their means, financial difficulties, unusually close relationships with customers/vendors, an unwillingness to share duties, and family problems.

2. Misplaced Trust in your Signature — Have you ever thought to yourself, “Fraud couldn’t happen to my company because I review and sign every check?” Signing checks may make you feel like fraud could never happen because you watch every penny, but this control can easily be sidestepped by your bookkeeper. Regardless of what you’ve heard before, simply reviewing and signing checks prior to mailing is not enough. Requiring dual signatures isn’t going to help either.

Consider these questions: Could your bookkeeper obtain a blank check, write it to himself or herself (or a friend), and forge your signature? Could your bookkeeper change the payee after you sign the checks, but before mailing?

In many check fraud cases, the company, not the bank, is responsible for detecting fraudulent checks. According to UCC Section 3-103(7), companies must exercise ordinary care, which requires account holders to follow “reasonable commercial standards.” Additionally, it is the company’s responsibility to review the bank statement and notify the bank of any unauthorized transactions.

Here are actions you can take:

• Keep blank check stock out of reach of your bookkeeper. All blank checks should be secured and tracked to ensure each check is used to pay a specific invoice or vendor.

• Don’t return signed checks to anyone with accounting responsibilities. Mail them yourself or have another office staff mail them.

• If you have a check signature stamp, be sure it’s always locked or, better yet, get rid of it. They just make forging your signature that much easier.

• Reconcile your bank statement, and perform a close review of cancelled checks from the bank. Notify your bank immediately if anything looks suspicious or does not agree to the accounting system. Additionally, we recommend having the bank statement sent directly to your home. This prevents any potential manipulation of the statement.

3. Misplaced Trust in Laser Check Paper — Have you ever thought to yourself, “Check fraud could never happen to my company, we have state-of-the art check-printing software and 27 check security features?”

Microprinting, heat-sensitive ink, watermarks, void pantograph, etc. … sounds pretty safe, huh? It all seems very secure, and some companies are making out on your need for feeling safe, but, the reality is, secure check paper is like putting the cart before the horse.

Often times, secure check paper does a very good job of preventing third parties from counterfeiting your checks and is a tool worth recommending. However, the illusion is that, like signing checks, this step will prevent a potential check fraud.

Consider this question: “Could your bookkeeper print a company check without needing the assistance of another person?”

If you don’t have proper controls over your laser check printer and/or check-printing software, your most significant risk, employee theft, is unimpeded.

Here are two actions you can take:

• If you use a laser printer and use blank check paper, restrict access to the printer and always require two employees to work together to generate a check. The physical act of printing checks must be a two-person task.

• Implement Positive Pay. Positive Pay is a service performed by the bank to prevent check fraud. The company submits check information (payee, date, amount, etc.) to the bank for each check issued. When the check is received by the vendor and presented to the bank, the bank attempts to match the presented check with the check information submitted by the company. If a match is found, the check will be processed. If a check is not found, the company is notified and has an opportunity to pay or return the check.

If Positive Pay is properly setup, it can severely limit opportunities for internal employee and external third-party threats.

The risk of employee theft from your accounting department is considerable, and the need to take action generally goes beyond the basics. Business owners need to take an active approach when many of the accounting tasks have been delegated to a bookkeeper.

Publication date: 1/26/2015 

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