This is my first installment of The Green Eyeshade, a periodic column for the Sopris Sun, broadly covering issues of interest to small businesses and nonprofits. The name refers to the caricature of old-time bookkeepers who, according to the internet, wore cellophane visors to protect themselves from eye strain.
I’m an old-time accountant myself, having started out as an auditor and then an accounting manager. Now I provide consulting services to small businesses and nonprofits. I love the energy and mission zeal of entrepreneurs and nonprofit leaders.
In my 40 years of doing this work, I’ve nearly seen it all. One thing I have seen far too often is incidents of embezzlement. I’ll not go into the gory details here; we’ve all seen the news stories. Many business owners know someone who was victimized, or were victims themselves. Occasionally, an incident is so large, it makes the newspapers. Yet, many more incidents never make it to the news. Because owners tend to prefer to move on, the cases are not publicized and the perpetrators are never prosecuted. In fact, some perpetrators move on to other companies and do it again. Embezzlement can happen in any setting and type of business, and often comes from trusted employees and even family friends.
Embezzlement means the stealing of money from an organization by a person in a position of trust. Embezzlement is often a crime of opportunity, whereby inattentive, distracted and trusting small business owners provide unmonitored access to the cash and credit of the company. Some employees have a moment of weakness or financial strain, and so they steal a little when no one is looking, telling themselves they will pay it back later. Or they impetuously seize an opportunity to increase their pay a bit, because they “deserve it.” Others are thieves to the bone. In any case, they often start with a small amount, and when no one notices, they take a little more, until they are in too deep to stop.
Small business owners and nonprofit directors are busy people. They have many obligations, and often little interest in accounting work. This is ironic, because the accounting is critical. In my experience, many small businesses significantly underinvest in their accounting. However, owners are insanely busy, so when they encounter a staff person who is willing and able to do the accounting, they feel lucky. This is the first step in the chain of embezzlement: not overseeing the accounting. Pretty soon, the accountant is opening all the bank statements, signing the checks and controlling all steps of the cash process without a second set of eyes checking in. This is the recipe you want to avoid.
What can a busy business owner do? What you can do is reduce the opportunity. Think of it like locking your car doors in the city, there are some things you can do to improve your odds and trim the opportunities for theft.
Control the cash, be the one to sign the checks. Or at least watch the cash. If you only do one thing: Watch the bank account and credit card statement. This can be as simple as logging in once a month and reviewing the activity. Look for unexpected activity, missing deposits or payments that don’t seem quite right. Do this every Monday, five minutes in the morning with your coffee. There, done — you have just reduced your risk immensely.
Other measures include: check references for new employees; open the mail yourself occasionally; use a “generic” email address for your accounting that you can access (such as “accounting@yourcompany”); listen to your customers and vendors if they complain about unusual recordkeeping from your company; ask direct questions of your accountants about unexpected results; set clear boundaries on the level of authority (in writing).
There are red flags to watch for. Not to go too deep into the profiling, but if your accountant is griping all the time about their low pay and their personal financial affairs are in a mess, you might want to consider a heightened state of awareness. Another red flag is bookkeepers who refuse to let others see into the books, or always have an elaborate excuse for why things don’t make any sense. These are nuanced concerns though — bookkeepers are control freaks by nature and necessity, and keeping up with the financial meanderings of small business owners can be a daunting challenge and difficult to explain.
Nonprofit boards have a role as well: Pay attention to the financial statements and the professionalism of your accounting function. If you do not have adequate financial expertise on the board, obtain it.
Finally, if you suspect that you have been victimized, see an accounting professional to determine the extent of the damage, and to close off access to further damage. Consider contacting the police.
I do not wish to overstate this risk, because the vast majority of accounting staff are hardworking, ethical people who want to help a company meet its goals. But it is important to think about, because a few modest preventative actions can reduce your risk and bring some peace of mind.
Malcolm McMichael lives in Carbondale and helps local small businesses and nonprofits with accounting management, CFO, strategic advisory and fundraising advisory services. Details about McMichael Management Services can be found at www.malcolmmcmichael.com