Issues related to fraud continue to resonate. Insider received this story from a reader.
A reality any smaller Company must deal with is how do we best utilize our staff, who typically will have multiple roles.
In one of my early COO roles, I went to work for a company who had an IRS problem they needed solved. Ends up they owed the Feds about $120K in payroll tax payments and related penalties.
The Company had been struggling with cash flow problems for quite a while. As I dug into operations I discovered that their bookkeeper had been getting payroll tax checks signed by the owner, BUT, instead of mailing to the IRS, was putting them in her desk drawer because there was not enough cash to cover the checks. It would seem like this would be fairly easy to catch, as there are plenty of opportunities to verify the payments were made. The reality of their situation proved that it was easier to hide than you would think.
For instance:
Since there was no benefit to the bookkeeper, at some point, why not just tell the boss?
- Ends up the owner was not in the office much and as the problem got worse, she realized her new “procedure” might just get her fired, so she stayed quiet. It eventually got bad enough where she decided to quit.
OK, but if these checks, usually in similar amounts, were literally, piling up, wouldn’t a monthly bank reconciliation catch all the outstanding checks.
- The bookkeeper was completing the bank reconciliations.
Eventually, the IRS does send out letters indicating late payments for the funds?
- Yes they do, but the bookkeeper was receiving and opening the daily mail. Those letters never saw the light of day.
Fortunately, the Company had a line of credit with the bank and they required an annual review. The outside accountant caught that there were so many checks outstanding and identified the problem, albeit, a little late.
As an owner of a small company, we know that being in the office is not the best way to create value, so how can I create some control points that won’t take much time? Here are some thoughts.
- Set up a P.O, Box and pick up and review the mail yourself. If you can’t do it regularly, train another trusted employee to do it (not the bookkeeper).
- Payroll services are an option and take the tax deposits automatically. You might think Quickbooks does this, but they may not. It still requires an employee to initiate an ePay.
- It is fine to have your bookkeeper do the bank reconciliations, but make sure you have seen the bank statement first and spend some time (5 minutes will do) looking through the completed reconciliation with the bank statement.
- If you can afford it, have a CPA come in for an annual review. But remember, a year can be a long time.
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