September 9, 2009

By Harry C Ballman, MBA, CPA, PFS; Arthur J Dykes, CPA; Donald S Paris, CPA.

In our 30 plus years of representing small business, let me first say that most bookkeepers we know have been honest, reliable, and trustworthy. But then came 9/11, stock market collapses, credit crunches, the recession of 2008, and Madoff; and it now seems the amount of stress in the workforce is at an all-time high, creating more opportunities for some to attempt to steal.

Take the case of 28 year old Sally, a bookkeeper and single mom at a $5 Million business in Northern Virginia. After the divorce, and with no significant alimony and a dead beat ex-spouse, where getting monthly child support payments seemed harder than healthcare reform, Sally reverted to some very ingenious and some very tried and true schemes to rip off her employer for over $100,000 before getting caught and convicted, ruining her life and her ability to ever get another bookkeeping job.

Most entrepreneur owners implicitly trust their bookkeeper, relying also on their accountant, bankers, lawyers, or others within the company to worry about boring details like internal controls, policies and procedures, reviews and sign-offs, proper documentation, budgeting, reviewing financial statements and statistics. "I’m too busy; I have to generate sales and manage the operations; anyway, Sally’s been with me for years--she wouldn’t steal from me!" We would venture to guess that most entrepreneurs and owners intuitively know their numbers, i.e., how much cash is in the bank, and what sales are for the week or day; but never would suspect their long term, loyal bookkeeper who juggles all the checks, deposits, and bills, and handles the volumes of paperwork in the accounting department.

Yet despite all that has been written on fraud, stealing, developing a system of internal control and a corporate culture that supposedly prevents and detects irregularities and theft, bookkeepers and others continue to rip off American businesses to the tune of $994 Billion per year*. The typical fraud costs a company anywhere from $10,000 to $500,000 annually.

Have you experienced (1) outright forgery of your checks; (2) petty cash theft; (3) phantom employees on the payroll, or bogus time sheets; (4) phony vendors; (5) bona-fide vendors but paid way more than normal; (6) deposits diverted to personal accounts; (7) inflated or fictitious refund checks to customers; (8) personal use of a company credit card or other crafty and devious methods; (9) phony expense reports, (10) missing inventory, or (11) fraudulent billing practices.

The impact on your company will cost you more than just the theft; the time and effort to document the issues for your insurance company, the lost productivity, and the effect on company morale, all add up to major headaches.

The current issue of The Journal of Accountancy, among many professional journals, continues to educate business owners on the risks of theft. Take the test at to evaluate your knowledge, or lack thereof, in recognizing whether someone is stealing from you.

As CPA’s, the best advice we can give our entrepreneurial owners/clients is to (1) stay deeply involved in all aspects of both internal and external accounting and must take the time to go over the books with your bookkeeper and understand what is in each account; (2) create a culture of trust and accountability within your company, but always have an inquisitive mind and ask lots of questions; (3) always review your monthly bank statements; (4) never give up check signing authority, and consider using a fraud protection check system - ask your banker about this; (5) if something looks odd, investigate immediately; (6) make sure you have adequate insurance coverage just in case you are victimized; (7) be very wary of your bookkeepers personal life problems to prevent them from becoming an opportunity for fraud or theft; as the most commonly cited behavioral red flag were perpetrators experiencing financial difficulties, and finally, (8) use common sense - if things appear odd, they usually are.

*Per 2008 survey conducted by the Association of Certified Fraud Examiners, Report to the Nation