Inattention to your company’s accounting records creates an environment for embezzlement.

Joan had been Carl’s bookkeeper for more than five years and had played a crucial role as Carl grew his plumbing and air-conditioning shop from two trucks to the six they now had. As the office workload had increased, Joan had stepped up to the challenge. Just about any time the doors were open, he could count on Joan being at her post. She hadn’t even taken a vacation in the past two years. But after his tax time visit to the CPA, Carl was pretty sure something wasn’t right.

A subsequent criminal investigation uncovered “ghost vendors,” a supply house giving her kickbacks and at least a dozen commercial service accounts having invoices discounted, also for kickbacks. For the three years they were able to verify, she had embezzled somewhere between $200,000 and $300,000 from his company.

Carl hadn’t hired a crook initially, but somewhere along the line, Joan turned criminal because she had discovered Internet gambling, resulting in some serious personal finance problems.

Since Carl showed hardly any interest in bookkeeping matters, it was easy for her to cover her tracks. What started out as a hundred bucks or so per week grew to a thousand or more per week as she became more bold and sophisticated.

Since the business was growing so fast, the shortfall would have been impossible to notice. Carl’s first clue came when he had to borrow in order to pay this year’s income tax, in spite of having a very good year in sales and profits.

Embezzlement is a crime that’s seemingly custom-designed just for PHC contractors. You didn’t come into the PHC trades because of your love of legume statistics. It’s easy to ignore the accounting minutia with so many other exciting tasks to do. Marketing, managing the crew, designing the jobs, making the sales are all more fun than bookkeeping. This makes it likely that you’ll turn over the number-crunching chores with only cursory supervision.

Your inattention creates an environment for embezzlement. It doesn’t guarantee you’ll be robbed, but if your bookkeeper wanders off the straight and narrow, it’s probably because you’ve made it easier for them to do so.

I’m Important! In our story above, instead of having a gambling problem, Joan could have been exacting justice on Carl for failing to give her the recognition and compensation she felt she deserved. Until she came along, Carl was just a struggling two-truck operator. In her earlier years with the company, she invested time and energy over and above what her position called for. Carl may have forgotten about her sacrifices as the profits started rolling in. Imagine the slap in the face Joan felt every time she wrote out a check to the country club.

This is not to say that the bookkeeper’s pay has to be linked to the owner’s privileges, but to simply ignore a key player in your business is asking for trouble.

Do You Bring It On Yourself? Perhaps Joan has a different form of justice in mind. Let’s say Carl had talked her into fudging the hours on a cost-plus job at a local hospital. “If he’s going to pad that contract for the hospital renovation, then I’d better get mine while I can. They may shut him down any day.”

Perhaps Carl wasn’t so blatant in his own brand of embezzlement, but his actions in other areas could taint the atmosphere. Perhaps a supply house invoice wasn’t billed properly, giving Carl an extra hundred dollars worth of materials at no extra charge. Maybe he fudged on licensing or insurance requirements for a contract. Perhaps he substituted a lower spec fixture on a job and got away with it.

Joan is privy to all these transactions. It isn’t a long leap for her to realize that, “Hey, he’s picking up some easy money, so why not dip into a little of it myself?”

Sunshine, The Best Medicine: Let’s face it, the only way to make sure there’s no larceny going on in your shop is for you to be the only one there. That is, of course, if you’re honest. If you ever hope to retire, flying solo is not a real good plan. You’re going to have to trust someone. Here are some basic procedures to help you let the light of day shine on key components of your back office.

  • Any processing of cash should be done with at least two sets of eyes. If you have several staff members, mix up who gets to be the second person just to prevent collusion.
  • You sign all checks. Require that each check be attached to its invoice so that you’ll know what’s going on. At times, this can be sobering to you as you see what it costs to keep the doors open.
  • Have bank statements sent to your home. Review them before giving them to your bookkeeper for reconciliation. Ask a few questions about items, especially out-of-sequence checks or multiple checks to an obscure vendor. If you don’t have a good question, ask about items related to a specific job or other account so that your bookkeeper will know that you’re watching.
  • Make sure your accounting program has its audit trail turned on. If you have password control for managing the audit trail, use it.
  • Have another CPA look over your books from time to time. It may be a bit traumatic, but a fresh set of eyes on your books could reveal some surprises. As a bonus, you may find ways to trim expenses.
  • If your bookkeeper becomes hyperdependable, skips vacations or time off, points accusatory fingers at others, and/or becomes very possessive of the books, watch out. Your bookkeeper could be a dream come true, or your worst nightmare.
  • Any discounts or price adjustments must be signed off by you or your appointee. Don’t leave it up to a single person.
  • Spot-check supply house invoices to compare with price quotes. There could be mistakes, or there could be collusion and kickbacks.
Don’t Forget The Perks:Most of us who are running the show know what it feels like to close that big sale, to bring a job in under budget or see our books add up in the black. That feeling is one of power because it was our effort, our idea, our ability that made those things happen.

Your accounting staff needs empowerment as well. They’re an important part of the organization, so let them play a more active role in its direction. Include them in your planning process when you’re considering adding a truck or other investment. Task your back office with meaningful projects such as finding more efficient uses of company assets or determining which services are most profitable for your company. Involvement builds commitment to the organization and prevents thievery.

Another perk is an investment in training. Offer your bookkeeper opportunities to move toward an accounting degree or to become fully certified as an accountant. Besides building esteem, you’ll get a payback as they help you navigate the finances of a growing company.

This is no guarantee that your employees won’t take advantage of you. You can only do your part to promote trust and integrity. But the alternative - no employees - is even more costly than taking the chance on trusting those who help you grow.

Your field personnel have an entirely different raft of embezzlement opportunities. Next month we’ll look at how the pennies add up, as well as the high-dollar losses you may encounter.