Construction Business Safeguards: Fraud and Embezzlement

We hear many stories from business owners who have had to recover from the theft of funds by their own employees. Today we’re sharing a list of things that you can do to protect yourself and your business.

Cash is the asset most susceptible to theft. It is easily misappropriated, lost or stolen. Every business should have an effective control system over all cash transactions: this includes both cash receipts and cash disbursements. It also includes checks received and written, since they can be turned into cash fairly easily.

Cash controls should include the following:

• Keep the cash-handling and record-keeping functions separate. Don’t let any one employee handle a transaction from start to finish.
• Reconcile bank statements on a timely basis and follow up on any large or unusual reconciling items. Be skeptical of any reconciling item marked “other” or “net.”
• The bank reconciliation should be done by someone other than the person in charge of writing, signing or approving the checks.
• Keep as little cash on hand as possible. Check how the petty cash account is used and keep the balance as low as possible.
• Cash receipts should be deposited when received. Also, do not make a deposit and take cash back.
• As soon as a check is received, it should be endorsed or stamped “For Deposit Only” with the account number.
• The receipts should be recorded promptly and the accounts receivable records updated.
• Make disbursements with prenumbered checks and account for all checks.
• Keep all checks in a safe place. Carefully control access to these checks.
• Keep a record of void checks. Write “VOID” on the check itself and tear off the signature corner.
• Prohibit checks payable to “Cash” and prohibit the signing of blank checks.
• Have a good system of approval, authorization, and documentation for all expenditures. Before paying any invoice, verify that the order has been received or the services completed and that the invoice computation is accurate.

There is more to preventing fraud and embezzlement than just controlling cash. Your company needs internal controls that should be evaluated on a regular basis. Use the following questions to look at the controls in place in your business. Keep in mind that this is a start, but it is not all-inclusive.

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CASH

• Are the cash-handling and cash record-keeping duties segregated?
• Are all expenditures authorized and documented?
• Do you conduct unannounced checks of petty cash and other cash accounts?
• Do you prohibit any single employee from handling a transaction from start to finish?
• Do you deposit all receipts to the bank daily?
• Do you prepare the bank reconciliation?

SALES

• Do you have proper segregation of duties to preclude an employee from pocketing cash from a sale but never reposting the sale?
• If you have too few employees for adequate segregation of responsibilities, do you play an active role in monitoring sales activities?

ACCOUNTS RECEIVABLE

• Do you have different employees responsible for various duties associated with accounts receivable? For example, the same employee should not be taking the order, building the job, billing the customer, collecting payment and depositing payment to the bank. (For small handyman projects, require a signed receipt / invoice from the client confirming the work done and total price.)
• Do you account for and physically control all returns and credits?
• Do you bill customers promptly?
• Is an accounts receivable aging schedule prepared regularly?
• Do customers receive a monthly accounting or billing?

INVENTORY

(Note: We normally counsel against contractors having inventory of any kind, but there are cases where it can be beneficial. If it is, then be sure and have these controls in place.)

• Are inventories physically counted at least annually?
• Is central control over inventories maintained?
• Is inventory adequately insured?
• Do you maintain safeguards against theft and pilferage?

FIXED ASSETS

• Are fixed assets acquired only with proper authorization?
• Do you take regular inventory of fixed assets?
• Are discrepancies between physical counts and accounting records resolved?
• Are fixed assets adequately insured?
• Are small tools and supplies properly safeguarded?

CURRENT AND LONG TERM DEBT

• Is there any proper authorization for the creation of any debt?
• Are liabilities promptly recorded?
• Are accounts payable checked for accuracy?
• Are bills only paid when the merchandise has actually been received?
• Do you take advantage of vendor discounts?

We received much of this information from a friend over fifteen years ago and shared it in a newsletter back then. If you know of things that should be added to this list, please share them in the comments below so everyone can benefit.