Question: I suspect my bookkeeper is stealing. How do I determine if she is?
Gary Elekes; Founder, EPC Training:
The idea that a bookkeeper is creating theft is a pretty common one. The first rule is not to accuse anybody but in fact to put in a process that establishes separation of duties. There’s an article on the EGIA site under the accounting section that describes separation of duties. All that really means is that the person who is controlling the bookkeeping entries, especially for the cash journal, wouldn’t be allowed to control the bank deposits or have access to the deposit legers. So, their name is not even allowed to be on that account.
The money flow cannot be handled by one person. You need two different people to withdraw money, write checks, and put deposits in. That’s one of the first things we do – we create separation of duties. In a smaller company where you have an office manager who might also be functioning as your call center person, your dispatcher, your CSR, and your bookkeeper, its easy as an owner who’s out in the field to allow them to also go make a deposit. When the company grows, the opportunity for theft arises because the original process didn’t accomplish separation of duties. It can be difficult for a smaller company to find the time to create that kind of business process.
However, separation of duties is fundamental and it’s one of the first things in accounting that we teach. The second thing is tax payments – being able to look at the money being distributed to the government from the bank accounts. Again, you want two different people to have access. There needs to be some form of reconciliation that occurs on that process. There’s been times in the past where the bookkeeper had access to the cash account, was writing the checks, putting the checks in the drawer, and as far as QuickBooks was concerned, checks were being written. They looked like they were being pulled out but of course the individual was removing that amount of cash in the exact sequence against the payroll taxes. So, it looked like the government was being paid but it wasn’t actually happening because the individual had access to both of those accounts. Separation of duties would have handled that.
The last thing you can do if you expect someone is stealing from you is bring in a third party to do some forensic accounting. It takes about an hour to look through the entries and the legers and it becomes pretty clear if that information is leading to something suspicious. A client of mine was paying me to do some forensic help. He was behind in his payments and owed a lot of money. He was selling a lot but couldn’t figure out where the money was going because he wasn’t very savvy at accounting.
It turned out that it was his general manager stealing by using his authority to go back in and adjust the bookkeeping function behind the bookkeeper. So, even though the purchase order was to Home Depot for materials to build a house, he built a separate million-dollar house for himself on the purchase order system by buying the material on the company credit cards and hiding the purchase orders from the bookkeeper.
It’s another good example of where you’re looking at your reports and KPIs tell you the story. If you’re not on KPI, there’s a reason why. That very well could be material theft, so we always use what we call the transaction process and the purchase order system. This is what they weren’t doing. That company ended up declaring bankruptcy because the owner couldn’t overcome the million dollars that was stolen.
The transaction process goes like this: we issue a purchase order for a condenser fan motor, that unit is pulled off my truck, when the invoice comes in, the invoice and the packing slip get matched up to the initial purchase order. So, if I was going to spend $60 on the condenser fan motor, the supplier billed me the $60, I show a receipt that was material handled that was checked by my warehouse or by someone that received it, and those three things are essentially stapled together or matched in the electronic process. That’s called the transaction process and we show that for every purchase so material doesn’t get taken off of a truck. When we do a cycle count on a truck and we count the material, it should match what we thought the inventory was on the truck.
There are lots of ways people can steal but if you follow the basic protocols of accounting, there isn’t a way for someone to steal without getting caught. It might happen for a short amount of time but in my company, you have about three days until the microscope starts looking very hard at what’s going on inside of your world. We’re a daily accounting business with purchase order systems and we inventory replenish daily. If you’re a weekly replenish company, you might go a week or ten days without catching someone stealing materials. On a cash basis, that should never happen if you have separation of duties.
This is the weekly Ask the Experts free excerpt. To listen to all of this or past calls, or to see the schedule and register for future calls, click here.