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Internal Cash Controls Keep Your Employees Honest

Want more information on managing your appraisal business? To order our newsletter, books, Reprint Series, or audiotapes, go to the Our Products page. This article was previously published in Appraisal Today (May, 1998) and was written by Ann O’Rourke. It is copyrighted. For reprint permission, Contact Us.

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Susan Smith has a very successful appraisal business, which expands each year. She attributes part of her success to her excellent office manager, Jeff Jones, who she hired 5 years ago. She hired him from another fee shop, one of her main competitors, just after he had quit. He handles all the bookkeeping and supervises the support staff, is good with pushy clients, and even corrects errors in appraisal reports!

Jeff Jones is so responsible that he hasn’t even taken a vacation for 3 years. He handles all the accounting, including running the complex accounting program. Susan doesn’t have to worry about a thing

But lately, even though Susan’s business has been increasing, it seemed as though she didn’t have as much money left after expenses. One day, while having lunch with her CPA, Tom Thompson, she mentioned her decline in income.

Tom Thompson asked a few questions. Did Jeff Jones take many vacations? Did he do all the bookkeeping? Did Susan review carefully all invoices be-fore signing checks and did she have someone else besides Jeff keep a separate cash receipts journal? Susan told him that Jeff never took a vacation, she didn’t really have time to check all the in-voices before authorizing payments, and that Jeff handled all the checks from opening the mail to posting in the accounts receivable ledger.

Susan Smith said Jeff was her best employee and she trusted him completely. Tom Thompson said, “There’s probably nothing wrong, but just to be sure, I’d like to come into the office this week-end, when Jeff’s not there and take a look at your books.”

You can guess the outcome. When Tom tried to reconcile the invoices with the canceled checks, he found discrepancies. Jeff Jones had been writing one or two checks per month to himself, forging a signature, and cashing the checks. It averaged $500 per month for the past year.

Susan is out quite a bit of money because she couldn’t get it back from Jeff, and hadn’t bonded him when he was hired.

Checking out new hires — the first step
If Susan would have checked with Jeff Jones’ previous employ-er, she might have found out that he had problems at work. If she would have run a credit re-port, she would have found that he was delinquent on many of his payments. If she had obtained a fidelity bond, she could have recovered her lost money. If she had set up strict financial controls, it probably would have discouraged Jeff from embezzling.

Who has sticky fingers?
You can’t tell embezzlers from the way the look, act, or dress. Successful ones are often “ideal employees” like Jeff Jones.

According to Donald Cressy, a sociologist who has studied embezzlers, most have a financial problem they can’t share with anyone, and they convince them-selves that its okay to take money. Often, when caught, they say, “I was only borrowing it. I planned to pay it back.”

Few of us could say that we wouldn’t be very tempted to “borrow” if we were stuck in a really bad financial situation.

First rule of internal controls
The first, and primary, rule is to have more than one person handle financial procedures. In small fee shops, this is often very difficult. However, the owner can re-view the bank statements and all canceled checks before any employee sees them, and can keep a manual cash log. Neither of these tasks takes much time. A forged signature on a check for supplies and deposits that doesn’t match the cash log can be easily seen.

Every embezzlement starts with a breach of internal controls.

Control cash receipts
     Here are a few simple rules:

  • Have someone other than the bookkeeper open the mail and list all cash receipts.
  • Have all checks endorsed “for deposit only” with a company stamp at the time the mail is opened.
  • Keep the cash handling and record keeping separate.
  • After all cash receipts have been listed by someone else, have the bookkeeper immediately record them.
  • Compare the listing of cash receipts with the cash receipts journal and deposit slips.
  • Deposit cash receipts in the bank every day.
  • Post cash receipts to accounts receivable ledgers promptly.

Controlling cash disbursements

  • Make all disbursements by check (other than petty cash).
  • Prenumber all checks and account for them.
  • Use a check protector for all checks.
  • Sign checks only if adequate documentation is presented.
  • Have only higher-level personnel sign checks (never the bookkeeper!).
  • Prohibit checks payable to cash.
  • Mail checks independently of the accounts payable function.
  • Prepare bank reconciliations.
  • Keep petty cash in a safe place.

Do I really need fidelity bonds?
Fidelity bonds on employees in positions of trust, such as book-keepers, is an insurance policy. You have other business insurance, such as E&O, liability, fire, etc.

Relatively few businesses have fidelity bonds, even though the risk of employee theft is much higher than the risk of a fire loss.

You may have to shop around for coverage, as most insurance agents don’t sell it often. The policy must be adapted to your business.
Employers sometimes resist bonding because they think their employees will be offended. Presenting it as part of the company’s overall business insurance cover-age can minimize adverse reactions.

The idea for this article came from an appraisal company that had serious financial trouble due to embezzling!