1 Simple Step to Reduce Your Chance of Embezzlement

Putting in internal controls over your accounting department can be a daunting project. There are many inter-dependencies that you have to consider. As a small business owner, you may not have the mental bandwidth or resources to implement a comprehensive system of internal controls. 

There's one step that you can implement today that will help you reduce the risk of embezzlement: MONITOR

Here's the background as to the why and how it can help:

Embezzlement, Not Good For Business

You may be excited to finally hire a bookkeeper and hand over the keys to your accounting. 


First, search Google for the term "bookkeeper embezzlement," and you'll come up with countless stories of bookkeepers stealing money from their employers. You'll also notice a pattern in these stories. Embezzlement happens over time, but can accumulate into a significant amount of money. It takes time to slowly gain the trust of the business owner so that he or she gives up more and more control--it's like a leaky faucet, put a bucket under it and you'll be surprised how much water you lose. The money leaves your business, one drip at a time. 

Fixing the Drip

First, a disclaimer: all systems of controls, no matter how robust, can be (and will be) circumvented. Internal controls geeks like to say "reduce the risk of X happening" because nothing is 100% preventable.

People like to steal cash. It's a lot easier to take than a computer from a business. No one misses a small amount of money here and there, but someone will notice that missing computer almost immediately. 

Your number one goal is to reduce the risk of unauthorized use of cash. There's a framework that is built to design internal controls over financial reporting. In the U.S. the framework typically used is the COSO framework.

The COSO framework says, in a nutshell, that there are five components to effective internal controls:

  1. Control Environment
  2. Risk Assessment
  3. Information and Communication-systems
  4. Control Activities
  5. Monitoring

Small business owners usually don't have the resources to implement internal controls using the COSO framework. But, there is one component that you should enforce immediately that costs nothing but a little time.

Prevention Starts with Awareness

Here's the one thing you should be doing to reduce the risk of embezzlement:

MONITOR (the 5th component of the COSO framework).

If you have a bookkeeper helping with your business accounting, this person is probably performing many incompatible tasks. For example, your bookkeeper is entering vendor invoices, cutting checks for vendor invoices, and reconciling the bank statements. 

If this process works for you, don't change it. You'll only need to introduce one monitoring step: review the bank statements and bank reconciliations that the bookkeeper prepares and make sure the bookkeeper knows you'll be viewing these documents on a consistent basis. 

Know What to Look For

When reviewing the bank statement ask yourself:

Is the ending bank balance where I expect it to be? Is it higher or lower than I would expect it?

This is a gut check. Most of us know approximately how much cash we should have and whether something appears reasonable to us. If you do nothing else, do this, because it causes you to be aware and awareness leads to smart accounting.

Is there a missing check number?

Bank statements usually list checks written in order of check number. Your bookkeeper should be issuing checks in order of the pre-printed check numbers if you're using pre-printed checks stock.

You should be aware of any missing checks.  Any missing check numbers on the bank statements should be in one of two places:

  1. The voided check:  A check could be issued with incorrect payment information and then voided. Make sure that you'll see "void" written on the check.
  2. The bank reconciliation's outstanding checklist: If your check is noted on the bank's reconciliation's outstanding checklist, your check is accounted for, but the vendor hasn't deposited the check. This is okay in most cases (see the bank reconciliation review below).

If you can't track down the missing check in one of these two places, it's time to start digging a little deeper. Start by asking the bookkeeper why the check is missing. 

Are the number of checks written within expectations?

Most of our customers only write a handful of checks each month. So, it's easy to spot a spike in check writing activity. Does your business write 5, 10, or 20 checks a month? Whatever it is, you need to gauge the number of checks written against your expectation.

Are the number of deposits (from customer checks) within expectations?

Another gut check. Does the deposit activity meet your expectations? 

When reviewing the bank reconciliation, do the following and also ask yourself: Does the bank reconciliation bank balances agree with the balances on the bank statement? Hint: they should.  If you can't match these numbers up, there's something wrong with the preparation of the bank reconciliation.

Are there checks on the outstanding checklist that have been outstanding for an unreasonably long period?

Think about this, when you send a check to the electric company, how long does it take the check to clear your bank account? Not long. 

When reviewing the outstanding checklist, you shouldn't expect to see any check that has been outstanding for longer than, say, one month. If you do, get an explanation from your bookkeeper as to why these checks are outstanding for so long. 

Are there any deposits in transit?

Deposits in transit are deposits made, but they have not yet appeared on the bank statement for the month. You shouldn't expect to see many, if any, deposit in transits. If there are, you should you expect them to be in transit for a couple of days (i.e. a deposit was made the day before a bank holiday). For any deposit in transit, check your bank account online to make sure you can see the deposit a couple of days later.

Just The Start

Remember the process outlined above is just the start. As your business grows, the complexity of the company will increase, the number of hands involved with bookkeeping may grow, and the volume of transactions will increase. When these things happen, you'll need to start adding the other internal control components because monitoring alone will not be enough. 

At this point you may want to consider adding an outsourced accounting team to assist you and your team with all your accounting and bookkeeping needs. Adding additional eyes that aren't in-house provide you with the piece of mind you'll need to focus on other aspects of your business. 

Photo by Alex Sajan on Unsplash