Business Advice: The Top 20 Financial Controls to Protect Your Company from Fraud, Theft, and Embezzlement

In my last article I shared some business advice with our readers. Three time-tested, broad-stroke strategies to protect your company from fraud and embezzlement.

Let’s dive deeper into the nitty-gritty details of financial controls.

Here are the top 20 financial controls to safeguard your company and protect your bottom line. I’ve divided these powerful suggestions into four categories to make them easier for you to apply to your business. (A quick thank you to my thousands of business coaching clients over the past 20 years who have helped me refine and test these financial controls in the only place that matter – the marketplace.)

5 Cash Controls:
• Bank statements should be mailed to the business owner’s house. The business owner should open and review the bank statement. (And she should mark up the statement so that her controller or bookkeeper sees that she’s looked closely at the statement!)

• Perform monthly bank reconciliations, preferably with someone other than the person doing the deposits.

• Use a lockbox or separate post-office box for accounts receivable payments instead of having them sent to a general company address that many more people have access to.

• Consider using a sweep account to take money over a certain amount out of your business’s main operating business account. This second sweep account should have much tighter financial controls around who can access it (usually with the owner being the only person authorized to move money out of that account).

• Do not keep signed blank checks for future use. This practice leaves you vulnerable for misuse. There are better ways to give you the flexibility for your “trusted” staff to pay for expenses if you are not available (e.g. company credit cards, two party “ACH” systems through your bank, two party check system with clear limits on cash held in that account, etc.)

5 Collections Controls:
• Any collections write-offs should be approved in writing by the owner or senior level manager.

• When possible, use prenumbered invoices and maintain an invoice log.

• Collections A/R reports should be reviewed weekly by management.

• The owner and senior management should periodically review the master client list for potential fake customers.

• Look for outside ways to verify your sales receipts. For example, compare the attendance numbers at a workshop against the gross income for that event, or the sales for the week against the traffic flow in your store. If something is out of line, investigate.

5 Accounts Payable Controls:
• All vendor invoices should be approved with the purchase order by the owner or estimator.

• Restrict access to corporate credit cards and require receipts and detailed invoices for all credit card charges. Have a formal expensing system that includes a clear, written policy of what expenses are and are not reimbursable, and who needs to sign off on what types of expenses. Also, require that all expenses submitted include a copy of the original receipt. Require your employees to sign their expense reports warranting that they are true and accurate.

• The owner should periodically review the master vendor list for fake vendors (a common way employees steal from a business). This is a simple report you can pull from your accounting software.

• Periodically, go onsite and hand out paychecks at your job site to see if you have any fictitious employees (especially for businesses with large off-site projects that have employees or contractors there whom they are paying).

• Establish and maintain “bidding and estimating” procedures that minimize risks of illicit bribes, kick backs, or collusion.

5 More Financial Controls:
• Make sure that any software or other purchase that the company pays for be owned and titled in the company name. This includes checking that the company is the one named with the software vendor or other supplier.

• Keep a close eye on your margins and key numbers. For example, if your cost of goods sold or gross margin is off, find out why.

• Thoroughly check employees and independent contractors before you hire them. Consider criminal background checks, drug testing, and credit checks.

• Consider bonding financial team members or getting appropriate insurance coverages.

• All overtime should be approved by management prior to it being worked.

I know the very thought of employee theft or fraud is enough to set your defensive screen up. “I trust my team.” Good, you should.

The purpose of these financial controls is not to turn you into a paranoid business owner who is suspicious of all your employees. Rather, the reason is to empower you to be a responsible business owner who radically reduces the temptation of some team member doing something inappropriate because they know that they will be caught.

Put these financial controls in place so that you don’t tempt a good seed into becoming a bad apple.

If you found this article helpful, then I encourage you to download a free copy of my newest book, Build a Business, Not a Job. Chapter Two shares 35 business controls that your business needs. Click here for full details and to get your free copy.