Protect Your Small Business from Embezzling Bookkeepers Part 1: Checking Account

February 5, 2008 By Erica Barton

These days, too many SBO’s (Small Business Owners) trust their employees far too much. They trust them to be loyal and hardworking and to never, ever steal from them. Unfortunately, theft happens far more often then SBO’s realize, and it occurs repeatedly for years before anyone ever catches on. Bookkeepers especially are the most trusted of an SBO’s employees and usually in the best position to rob an SBO blind. According to the book “Executive Roadmap to Fraud Prevention and Internal Control, “the typical United States Organization loses 6 percent of its annual revenues to fraud.” SIX PERCENT! Of those who are caught, it is not a first-time event for the thief, but a repeated occurrence that can go undetected for years. Furthermore, if an embezzler is caught, they rarely ever pay back the full amount they stole, and they rarely ever serve more then a year in jail. So consider this, how much of your company’s income can you afford to have stolen?

This article is the first of a four-part series on protecting yourself from bookkeepers. It is not written to make anyone point fingers or fire their bookkeepers. It IS written to protect SBO’s and to teach them the most common ways that bookkeepers steal. By simply changing up your involvement in your books, you can stop embezzling cold and make it incredibly difficult to be robbed.

Here are ten examples of how I might steal from you if I were your bookkeeper, and ten simple strategies on how to protect yourself from my machinations:

1. Always Open Your Own Bank Statement: If I am your bookkeeper and I am stealing from you, forging your signature is the easiest way. Stealing checks out of sequence and signing them to myself will soon net me thousands of your money in a very short period of time. If I were doing this, guess what I’m going to do when you give me an unopened bank statement. I am going to find the “evidence” and destroy it. In other words, I’m going to find the checks I wrote to myself and tear them up. You will never know the difference because the check will be out of sequence, and the only way for you to find out is if you spend thousands of dollars to have my bookkeeping entries audited. By opening your own statements and thumbing through the checks, you are going to catch every forged check before I get a chance to do anything about it.

2. Lock up Your Checkbook: Not only is this good advice for protecting yourself from bookkeepers, but from other unscrupulous employees as well. By making your bookkeeper and employees ask you for a check whenever they need money, it keeps you involved and your employees accountable.

3. Always Insist on Seeing Voided Checks or Voiding Checks Yourself: If I am your bookkeeper and I am determined to steal from you, I am still going to be eyeballing those checks and waiting for my opportunity even though you are locking the checks away and looking at the bank statements. One common way for me to do this is to get you to sign a check to me for “cash” to cover expenses, and then I say, “I had to void the check.” In actuality, I did NOT void the check. I pocketed it and I will cash it the next time I go to the bank. You write me a second check, and I cash that one too. When the check comes in on the bank statement, you think nothing of it because you write me checks for “cash” or “reimbursed expenses” all the time. It’s also your signature on the check…nothing out of place and nothing that alerts you to a problem because you just assume that you are looking at the same check “again” when you come across the second one. By insisting on seeing the voided check, I would have to write “Void” on it to prove that I am not lying. If Void is not written on it, then you need to write “Void” across it before you sign a second check. This way, I can’t dig it out of the trash later and cash it. (And yes, you DO want to keep even the checks you void in case you ever get audited. The IRS will ask to see voided checks as well as cashed ones.)

4. Never let anyone but a partner be a signer on a checking account. If you have your bookkeeper as a signer on your checking account, go tomorrow and take them off immediately. If I am a signer on your check, that means I don’t need you to be with me to walk into your bank and drain your account. And guess what…the first time you ever piss me off enough to quit, that’s what I’m going to do. I will either write a huge check to myself and cash it right after I get my last paycheck, or I will walk into the bank, wipe you out, and disappear off the face of the Earth. Sucks to be you…cool to be me. I’m in Barbados toasting your naiveté while you are struggling to keep your business open. Cold hearted? Absolutely. Unfortunately, if your bookkeeper is a signer, you set yourself up for it. Get them off your account TODAY.

5. Never sign a check for a person or a company you are not familiar with. If I am a true embezzler, then I am going to “collude” with my family members and friends to rob you blind. How do I do this? Simple. I write checks to my family and friends and tell you that it is a vendor. You think nothing of it and sign the check. My friend/family member cashes the check and gives me the money, and I give them some cash for doing it. It all looks legitimate to you, and of course, I’m going to make it look legitimate before handing the books over to an accountant. Be wise. If you don’t know the person or the company, DON’T SIGN THE CHECK. Let the person or the owner of the company show up in front of you with proof that they did the work before you pay them. Most people will not want to lie to your face, although some will. Always ask for proof, and always make them come to you.

6. Get a Deposit Stamp AND STAMP EVERY CHECK THAT NEEDS TO BE DEPOSITED: Another common theft practice is for a bookkeeper to open a company with a name similar to yours. For example, if your company’s name were “Smith’s Distributing,” as an embezzler, I would open an account called “Smith’s Distinguished Products.” Now, every check that comes across my desk where the payee has written “Smith’s Dist.” is now fair game. I can deposit that check into my dummy account, and I mark the corresponding invoice paid. If you purchase a deposit stamp with your bank name and account number along with the words “For Deposit Only,” that badly written check CAN ONLY be deposited into your account. In this manner, you can save time looking over all the checks and worrying over every deposit, while also keeping those checks where they belong. IN YOUR BANK ACCOUNT!!!

7. Get Carbon Copy Deposit Slips: Get carbon copy deposit slips and only give one booklet to your bookkeeper each month. While they still can be conniving in the way they make deposits, it helps you keep track of how much money should have gone into your bank account and who’s check was deposited. Instead of check numbers, put down customer names on the deposit slips, and you can quickly and easily see who paid you, when they paid you, and when that money should have gone into your account. When the bank statement comes in, grab the booklet of copies and match your deposits up really quick. Anything that’s missing will alert you to possible theft and make you watch your bookkeeper that much closer.

8. HAVE THE COMPUTER WITH YOUR BOOKKEEPING FILES AUTOMATICALLY DO A DAILY BACKUP IN THE MIDDLE OF THE DAY TO AN EXTERNAL HARD DRIVE. Not only will this save any “original” data entry that your bookkeeper has done, but it will give you copies that are easy to go through should you suspect embezzlement. By handing your backup over to a professional fraud examiner, they can tell you fairly quickly if something “is not kosher.” Make sure your hard drive has a password that only you know, and when your bookkeeper splits, you won’t be high and dry with a wiped out computer and missing files.

9. DEMAND TO SEE BANK RECONCILIATIONS: If you do not know your bank balance, this is a big warning sign that something is not right. Bank reconciliations usually take no more then half an hour to complete. If it’s been months since I (as your bookkeeper) have given you one, I am either not a very good bookkeeper, too busy to focus on what should be a priority, or I am stealing from you and I don’t want you to know how low your bank balance really is. By giving a bank reconciliation to you each month, you can look and see which checks and deposits have cleared and which ones are still outstanding, and you will know if too much money is going out and why. Make sure you demand these and make sure you give your bookkeeper the time to do them.

10. Keep copies of all reports from your bookkeeper. If I am stealing from you, I am going to doctor my reports. Period. However, I am not going to doctor original reports that I am showing you because you will notice at the time that something is missing. For example, if I give you a copy of the check register right after writing 20 checks, you are going to notice if there are gaps in the check number sequence, and if there are voided checks. You are going to want to know why. I will give you an explanation (one that you will believe) and I will probably want that report back. Afterall, it really IS a bad idea to have your business’s financial information lying around. However, the next time I give you a register, I might have changed names or amounts on old checks and you won’t notice because you sign too many checks to remember everything. By keeping originals, you can occasionally pull out the old reports and compare them to new reports to make sure nothing has changed. It will alert you immediately if something is different, and it serves as excellent backup should your bookkeeper ever pull a “Delete-And-Bail” on you.

So now that you have some fabulous strategies on protecting your checking account, look for Part 2: Credit Cards and Identity Theft now published on American Consumer News.

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