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The Mistake of a Business Owner in Not Having Checks and Balances

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The Mistake of a Business Owner in Not Having Checks and Balances

Hypothetical 1:  Sarah has a successful massage therapy business. One of her long-time friends, Jill, has worked for her for five years. Sarah trusts her completely. Their children are friends, the families hang out weekly, and they attend church together. With massage therapy, a lot of clients pay cash. However, Sarah never requests any documentation about the cash that her employees receive as she trusts them. Then, Sarah makes a startling discovery – Jill has been pocketing some of the cash that clients have paid her for the massages.

Hypothetical 2:  Beth has an art gallery. Her longtime CFO, Bill, is hardworking and dedicated. He never takes any vacation. Beth just shrugs it off as he is a “workaholic.” Bill then unexpectedly has to have surgery and is out of work. Her interim CFO quickly notices numerous discrepancies in the books. Upon further investigation, Bill has been embezzling hundreds of thousands of dollars from the gallery.

It is important to have proper checks and balances in place to prevent fraud. Your business is at risk whenever others have access to your cash, checks, supplies, inventory, etc. For example, pocketing cash that was intended for the business can be checked by having policies in place regarding the steps when a customer makes a payment with cash. One way is for the customer to receive a cash receipt, and have both the employee and the employee sign the cash receipt. If part of the cash receipt is a tip, the cash receipt will need to be customized to include a tip amount.

Another common method of fraud is check tampering. It is important that you have separation of duties. For example, the individual who cuts the checks is different from the individual who balances the monthly bank statements. It is important for there to be check logs, separation of duties, limited access for accounting software, sporadic cash drawer audits and other internal controls.

Equally important is for your accounting software to alert you if one person alters something that was entered by someone else. You also should request financial information from your bookkeeper/CFO at unexpected times.

It is also essential that you do not have one employee have full control over inventory tracking or supply tracking. It is important that there are separation of duties and that there are multiple ways to prevent fraud.

Spangler and de Stefano, PLLP assists business owners with most aspects related to their business, including ensuring proper checks and balances.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.