FRAUD AND EMBEZZLEMENT
by Michael Stone

These two words can send bolts of anger and frustration through those who own a business. We work hard, and someone decides they are entitled to steal our lunch. I asked a friend, Gigi Valenti, of Carson City, Nevada to tell us how to prevent fraud or embezzlement in our business. Gigi is a CPA, and the majority of her practice is with contractors.

Cash is the asset most susceptible to theft. It is easily misappropriated, lost or stolen. Every business should have an effective control system over all cash transactions--this includes both cash receipts and cash disbursements.

Cash Controls should include the following:

- Keep the cash handling and record keeping functions separate. Don't let any one employee handle a transaction from start to finish.

- Reconcile bank statements on a timely basis and follow up on any large or unusual reconciling items. Be skeptical of any reconciling item marked "other' or "net."

- The bank reconciliation should be done by someone other than the person in charge of writing, signing or approving the checks.

- Keep as little cash on hand as possible. Check how the petty cash account is used and keep the balance as low as possible.

- Cash Receipts should be deposited as received. Also, do not make a deposit and take cash back.

- As soon as a check is received, it should be endorsed or stamped "For Deposit Only" with the account number.

- The receipts should be recorded promptly and the accounts receivable records updated.

- Make disbursements with prenumbered checks and account for all checks.

- Keep all checks in a safe place. Carefully control access to these checks.

- Keep a record of void checks. Write "VOID" on the check itself and tear off the signature corner.

- Prohibit checks payable to "Cash" and prohibit the signing of blank checks.

- Have a good system of approval, authorization, and documentation for all expenditures. Before paying any invoice, verify that the order has been received or the services completed and that the invoice computation is accurate.

But there is more to preventing fraud and embezzlement than just controlling cash. Your company needs internal controls that should be evaluated on a regular basis. Use the following questions to look at the controls in place in your business - keep in mind that this is a start, but it is not all-inclusive.

CASH

- Are the cash handling and cash record keeping duties segregated?

- Are all expenditures authorized and documented?

- Do you conduct unannounced checks of petty cash and other cash accounts?

- Do you prohibit any single employee from handling a transaction from start to finish?

- Do you deposit all receipts intact to the bank daily?

- Do you prepare the bank reconciliation?

SALES

- Do you have proper segregation of duties to preclude an employee from pocketing cash from a sale but never reposting the sale?

- If you have too few employees for adequate segregation of responsibilities, do you play an active role in monitoring sales activities.

ACCOUNTS RECEIVABLE

- Do you have different employees responsible for various duties associated with accounts receivable? (i.e.: taking the order, building the job, customer billing, collecting receivables, depositing collections to the bank)

- Do you account for and physically control all returns and credits?

- Do you bill customers promptly?

- Is an accounts receivable aging schedule prepared regularly?

- Do customers receive a monthly accounting or billing?

INVENTORY

(Note: We normally counsel against contractors having inventory of any kind, but there are cases where it can be beneficial. If it is, then be sure and have these controls in place.)

- Are inventories physically counted at least annually?

- Is central control over inventories maintained?

- Is inventory adequately insured?

- Do you maintain safeguards against theft and pilferage?

FIXED ASSETS

- Are fixed assets acquired only with proper authorization?

- Do you take regular inventory of fixed assets?

- Are discrepancies between physical counts and accounting records resolved?

- Are fixed assets adequately insured?

- Are small tools and supplies properly safeguarded?

CURRENT AND LONG TERM DEBT

- Is there any proper authorization for the creation of any debt?

- Are liabilities promptly recorded?

- Are accounts payable checked for accuracy?

- Are bills only paid when the merchandise has actually been received?

- Do you take advantage of vendor discounts?

As Gigi and I discussed this article, I told her about a few instances of fraud or embezzlement that have come to our attention of late. She said, "I would venture that those particular employees were probably trusted and had too much control, especially over cash." Gigi was absolutely right. Fortunately, neither of the companies was burned too badly, but even a dollar is too much.

We hope that information will not only cause you to rethink how you now conduct your business in house, and to set up safeguards so the words "fraud" and "embezzlement" don't appear in you or your attorney's vocabulary.

Michael Stone has more than three decades of experience in the building and remodeling industry. His new book, Profitable Sales, A Contractor's Guide was released in May of 2007, he also wrote the book Markup and Profit; A Contractor's Guide, published by Craftsman Book Co. Michael offers Coaching and Consulting services for construction companies throughout the U.S., as well as audio and CD programs for business management, and is available for speaking engagements. He can be reached by:

e-mail: michael@markupandprofit.com
phone: 1-888-944-0044
website: www.markupandprofit.com


Copyright (c) 2007 by Construction Programs and Results. All Rights Reserved. No part of this content may be reproduced, distributed or transmitted in any form or by any means, nor may any part be stored in a database or other electronic retrieval system, or any other website, without the prior written permission of CPR.