Don’t get robbed Featured

9:43am EDT July 22, 2002

Fraud and theft at a business often involves someone with cash disbursement responsibilities.

The risk of embezzlement is high if you allow one person to be responsible for placing an order with a vendor, authorizing a purchase order and check requisition, and writing and signing the check. Segregating duties, establishing a system of checks and balances, and properly implementing policies and procedures can alleviate risk.

Evaluate existing controls

The first step is to evaluate existing controls. It is usually more effective to do this by separating accounting functions into individual cycles. By focusing on one specific activity, such as disbursements, all aspects of that activity can be closely scrutinized. Once existing controls are identified, it is easy to see potential security breaches.

When establishing controls, consider the specifics of your business. A small automobile dealership with two or three accounting employees will not be able to effectively segregate duties. In this situation, a compromise is needed between the cost of hiring more employees and potential for theft.

A third party, such as an independent accountant, can be a good source of internal control analysis, providing objectivity and expert knowledge. Often, you can’t see the forest for the trees, and an accountant can easily detect material weaknesses and readily provide advice for correcting them. Professionals can also apply internal control experiences from other businesses to your company’s problems.

Implementing control policies

The key to implementing policies is effective communication and enforcement.

Give a written manual clearly stating your position to each applicable employee. Require them to read and sign a statement that they understand and will abide by these regulations. Although this may seem like overkill, it is the most effective method of communicating and may provide future legal support for employee terminationdue to theft or other reasons.

Establishing a clear system of checks and balances can help identify existing problems. Matching purchase orders to receiving documents and vendor invoices can prevent future misappropriations. Requiring copies of invoices to be attached to checks for review by authorized signatories helps prevent unauthorized purchases. Reviewing expense trend analysis, monthly payable journals and general ledger accounts can bring to light large or unusual charges or unauthorized payments.

Payable control basics

To help protect your business against fraud:

  • Issue pre-numbered checks in sequential order.

  • Immediately deface all voided checks.

  • Require dual signatures, unless the owner signs.

  • Do not issue signed blank checks.

  • Require owner’s signature for pre-established dollar amounts.

  • Require supporting documents accompanying a check to be reviewed by authorized signers.

  • Periodically scan canceled checks in numerical sequence for missing ones.

  • Require purchase orders for all purchases.

  • Maintain purchase orders in one area.

  • Issue pre-numbered purchase orders in sequential order.

  • Create a separate receiving department.

  • Ensure that all available discounts are taken.

  • Require turn-in of the old purchase order book before a new one is issued.

  • Match authorized purchase orders with receiving document(s) and vendor invoice(s) before payment.

  • Establish a policy against debit balances in the accounts payable journal.

  • Segregate duties among purchasing, receiving, check preparation and signatory.

F. Jeffrey Kovacs ( is a shareholder with Schneider Downs & Co. Inc. in Columbus.