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Don’t lose touch with your company’s wheel of fortune

Idaho small businesses accounted for nearly 60 per cent of private sector jobs in 2008, according to the US Small Business Administration. It’s a challenging path: owners need broad expertise in operations, sales, finance, marketing, human resources, and every other aspect of starting, growing and managing a business.

For small business owners who do not enjoy working with numbers, one of the first tasks they delegate is bookkeeping. They may delegate to a family member, a friend, an independent bookkeeper or an accounting firm. Regardless of whom they hire, it is tempting to shift all responsibility for the endless monotony of number crunching to others. Small business owners believe their businesses depend on their involvement in operations. Such entrepreneurs are tempting fate by taking a hands-off approach to their finances and reassign the company’s wheel of fortune.

In this case, the wheel of fortune is held by the trusted bookkeeper or office manager who conscientiously assumes responsibility for more and more tasks as the company grows. Eventually that person controls billing, collections, purchasing, vendor payments and payroll, and she diligently reconciles the bank account every month (in other words, she has complete control of the accounting process, with no oversight, no accountability and no transparency.) She is an invaluable asset to the business owner.

Until one month when the bookkeeper spins her personal wheel of fortune and comes up short. She borrows a little money from the company to cover her bills, promising herself she will pay it back. When her “personal loan” goes unnoticed, she borrows a little more. Twenty dollars turns into fifty, which grows to a few hundred, and then starts to increase exponentially to thousands, tens of thousands, sometimes hundreds of thousands of dollars.

Vendors go unpaid, payroll withholdings are not deposited, and unauthorized advances are made on business credit lines. The business owner doesn’t worry because there is money in the bank. In this scenario, the business owner tempted fortune and lost.

The SBA estimates that 50 per cent of small businesses fail, in part due to poor financial management. Many Idaho businesses have suffered from the misdeeds of an employee with a faulty moral compass: body shops, restaurants and bars, ice cream stores, contractors, medical offices, law firms, manufacturing companies, title companies, dentists, real estate companies. Trusted employees have victimized all types, sizes and shapes of Idaho businesses.

In a bi-annual fraud survey by the Association of Certified Fraud Examiners, small businesses consistently suffer disproportionately higher losses than large businesses – nearly twice as high. This is due to unreliable checks and balances in small businesses. Fraud risk is mitigated by dividing accounting tasks among several people, which is not feasible for a small business where only one or two people are involved in the accounting process. Oversight is the only way to compensate for this lack of resources.

Let’s re-write our scenario. This time, the business owner delegates routine bookkeeping tasks to an employee or independent firm, but keeps an eye on the finance with procedures like these:

Reviews all bank activity, including cancelled checks, at least monthly.

Verifies that payroll withholding deposits are made timely.

Requires that invoices, timecards and other supporting documents are attached to checks before signing.

Refuses to sign blank checks.

Would never, ever, ever consider having a signature stamp.

Retains the administrative password to the accounting software.

Has the accountant drop by every three or four months to review and analyze transactions in high risk areas.

Keeps in touch with the banker, key customers and key vendors to build rapport and let them know whom to call if there is ever a problem or question about the business.

Small businesses are critical to Idaho’s economy. Business owners who insist on personal accountability and transparent business practices will lead Idaho out of the recession and into more prosperous times.

Trust, but verify.

Denise McClure, CPA, CFE is a forensic accountant and the owner of Averti Fraud Solutions, LLC in Boise. She is a frequent author, speaker and trainer on preventing and deterring embezzlement and fraud. Her ideas on fraud risk management have helped organizations improve efficiency, profitability and security. For more information, visit www.AvertiFraudSolutions.com or e-mail Denise@AvertiFraudSolutions.com.

About Denise McClure