The CEO of a multi-million dollar landscape company in Maryland shared with me how his controller, a long-time friend, during a period of almost 20 years, had embezzled more than $1 million from the company. The controller, due to a guilty conscience, confessed to the CEO what he had done. Otherwise, the CEO may never have discovered the fraud.
A bookkeeper worked for another California landscape contractor for more than seven years. Upon her departure, the owner noticed cash flow seemed to improve significantly. A fellow office staff member, shortly thereafter, shared with the owner that prior to her departure, the bookkeeper spent almost three days shredding and destroying files. Connect the dots.
An irrigation contractor in Michigan had to terminate a bookkeeper who just wasn’t up to the job. Months after she left, the new bookkeeper noticed a gasoline credit card bill that seemed suspicious.
Upon further investigation by detectives, the gas station security cameras showed the terminated bookkeeper filling up her car’s gasoline tank using a duplicate company credit card. Legal action followed.
The unlocked lock.
Why is there so much abuse and outright fraud within the small business community? Here are some of the reasons.
1. Roughly 70 percent of my clients use QuickBooks or a version of it for their accounting. The security features within it are less than foolproof. Once posted, transactions can easily be erased or altered to cover up fraud.
2. Entrepreneurs are optimistic and trusting individuals. They tend to think the best of people and sometimes overlook prudent safeguards, and checks and balances within their organizations.
3. This is sure to be controversial, but tax code accounting is not an operational necessity. It adds little intrinsic value to the organization other than to meet arbitrary tax code requirements. If the tax code was replaced by a value-added tax (V.A.T.), a national sales tax or a flat tax, 90 percent of what bookkeepers do would be eliminated. Job costing, for example, has nothing to do with the tax code, but everything to do with a company’s profitability. I tell clients that my job is to help them make as much money as possible.
Their CPA’s job is to make them look like they are going broke and to keep them out of jail. Ninety percent of what a bookkeeper does to meet tax code requirements is arbitrary, meaningless and would be eliminated by a V.A.T., flat tax or national sales tax.
People with arbitrary, meaningless jobs tend to be insecure. Driven by insecurity, a small percentage of them tend to bend the arbitrary rules, in their favor, for personal gain.
4. A lock is not meant to keep a thief out. Rather it is meant to keep an honest man honest. Many entrepreneurs simply do not know how to implement simple safeguards in their company.
Ronald Regan was right.
Fraud is common place within the small business community. When discussing this topic with Mark Pendergast, president of Salmon Falls Landscaping in Berwick, Maine, he stated, “In the end, you have to trust your people.
Otherwise, you’ll spend all of your time mistrusting everyone and looking for abuses.” I agree. In the end, like Ronald Reagan said, you have to “trust but verify.” Here are a couple of good rules for entrepreneurs to follow.
First, open all bank statements. Second, have tight controls for the signing of checks. Third, personally hand out payroll checks at least once a month. Fourth, if you suspect fraud, hire a forensic CPA (Google “forensic CPA.)”
You can’t eliminate fraud entirely. However, with the proper procedures, and checks and balances, you can discourage it. Like Mark Pendergast said, “You have to trust your people.” But add to that the words from the ”Gipper,” “Trust, but verify.”
JIM HUSTON runs J.R. Huston Consulting, a green industry consulting firm. See www.jrhuston.biz; mail firstname.lastname@example.org.