By Chrissie A. Powers, CPA/CFF, CFE, CVA
I have been working with several small business owners over the last several months who have been victimized by their office managers. Their office manager was able to steal from them as he was trusted and given too much control and access. The office manager recognizes this internal control weakness and exploits it. Many times the business owner feels embarrassed and blames themselves for allowing this to occur. The owner is often times reluctant to prosecute or even contact legal counsel.
So, how did many of these business owner's end up needing my services? How did they become victims within their own organization?
Many small business owners develop a relationship with their office manager's beyond the office. They trust their office manager and rely heavily on them day to day. The owner functions with blinders on. They cannot fathom being a victim and trust their office manager forgetting to structure the office hierarchy by implementing segregation of duties when at all possible.
Never allow one individual to have access to everything. The business owner must maintain a part of the office administration to a degree. This will create good checks and balances.
Some office managers aren't shy about putting their hand in the company cookie jar. They will blatantly pay their personal bills or write checks to themselves directly out of the business checking account. When at all possible implement segregation of duties to deter this from occurring. If your organization is too small to separate the check writing function, the signing of the checks, and the bank reconciliation; we suggest mailing the bank statement to the owner's home. The owner can then review the original bank statement and scrutinize the monthly disbursements. The owner should always inquire about at least a few checks per month so that the employee knows he is watching.
Credit cards can be a bad thing for small businesses. Limit the number of employees who have credit cards. Company policy should state always maintain possession of your credit card and never loan it to anyone. If an employee is caught loaning their card or charging personal items on the company credit card, they will be terminated.
If the office manager has a company credit card, do not give them the authorization to review the monthly statements and authorize the payment. This is a lack of segregation of duties. There is the possibility that the owner may have to take on this task in order to deter fraud from occurring.
Company policy should require detailed receipts to be maintained for accounting records of items charged on the credit card. With so many one stop shopping stores, it is hard to determine if purchases are legitimate business expenses without the detailed cash register receipt.
The organization uses an outside payroll company to process payroll. The owner assumes that fraud can't occur because the office manager doesn't write the payroll checks and the company uses an outside vendor. The office manager calls in payroll every week and has the authority to direct the payroll company. The office manager relays bonuses and pay increases to the payroll rep. The payroll company has been authorized to deal with the office manager so they don't follow up with the owner to reconfirm the information is accurate and authorized. What's to stop the office manager from giving himself an extra bonus or a pay raise? Nothing. In small organizations, the owner has to either call in the payroll or be available for the payroll company to verify the information is accurate.
Cash is the most appealing asset to steal because it doesn't need to be converted like a check. The office manager accepts the payment from a customer but doesn't record the payment. He pockets the money instead. In order to deter this from occurring, all customers should be given receipts.
Larceny is another scheme office manager's pull by stealing from the daily receipts before the money is deposited in the bank. I frequently see this in the medical industry where the organization has a stand-alone billing system. The billing system is never reconciled to the accounting system, thus making it easy for the office manger to steal from the daily deposit. If your business uses a stand-alone billing system, the billing and accounting systems need to be reconciled regularly.
Now that the owner is a victim we pull the insurance policy and find out there is no dishonest employee coverage or the coverage levels are not adequate. The insurance policy should be analyzed once a year to determine if the coverage levels are adequate.
Not all fraud can be prevented but there are ways to reduce the business losses. If you have additional questions or concerns regarding fraud, don't hesitate to contact us at 614-745-5192.