More Subtle Clues that Something isn’t Right with a Business
Last week I gave you my “top three” things to implement to keep the honest people honest.
The most important thing is if something doesn’t look right, you MUST question the person responsible for it.
Here are three more areas to watch:
1. Sudden or small changes in gross margin
One of the easiest ways to steal from a company is to order materials from the company’s suppliers on their accounts and send them to a company that person ordering the materials owns. The company has additional direct costs which affects gross profit and gross margin. In fact, the CFO who was convicted of embezzling last year used this method.
If a company doesn’t track inventory, then it has a huge temptation for field employees. They can “take two or three” when they need one part. The others can be sold. Or, they can store the extra and use it when they start their own business.
If gross margin decreases, you need to know why. With no reasonable explanation, there is a great likelihood that materials are walking out the back door.
2. The company’s vendor list
Make sure the company owners know who all of their vendors are. Print a vendor list every quarter… which is done by the owner. Do not ask your bookkeeper to do it!
Look at the names on the list. Notice if there are two similar names, i.e. ABC Business and ABC Company and ABC Industries. It’s very easy to open a checking account with a similar name to a vendor with whom the company does a lot of business. Just a few hundred dollars each month in this bogus account adds up to a lot money over the years.
3. The person who balances the checkbooks does not sign checks
If the company’s bookkeeper reconciles the accounts and signs checks, then the bookkeeper can reconcile payments to herself. As I wrote last week, the company’s bookkeeper should not have check signing authority.
Next week I’ll write about more other simple procedures.
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