Employee Dishonesty Controls

Every business must develop a system to protect its assets from the dishonest actions of its employees. Listed below are several tips that have been developed to help firms establish internal controls to reduce the possibility of loss. Remember, each business is unique and there are no universal controls that will work for everyone. Use these ideas as tools to establish your own unique controls and safeguards.

Why Employees Steal

Employees may be tempted to steal if they have extensive gambling debts, extravagant living standards, unusual family expenses, or are experiencing substance abuse.

Employee Theft Warning Signs

Suggestions for Internal Loss Prevention Controls

1. The Accounting System
   A well-planned system generates clear and simple reports for all levels of management, which clearly points out discrepancies.
2. Audits
   Have an annual audit prepared by a CPA. A compilation may not be objective enough.
3. Cash Receipts
   All cash receipts should be deposited daily. Use pre-numbered invoices that require cash be posted by invoice number. If possible, do not let anyone work alone; rather, maintain two or more at all times. In addition, do not let cash accumulate in the cash drawer. Develop a system to deposit large amounts into a “drop box.”
4. Disbursements
   All disbursements should be made by check. Require two signatures for the checks exceeding $500 or more. If possible, restrict authorized signatories for all checks to the Chief Executive and/or Treasurer. Review the daily check register.
5. Accounts Payable
   Develop a system of accountability and note each invoice as paid to avoid duplicate payments.
6. Purchasing
   Establish a purchase order procedure requiring prior approval. Make your suppliers aware of the system. In addition, use pre-numbered purchase orders.
7. Bank Statements
   Bank accounts should be reconciled by someone who is not authorized to deposit or withdraw. Carefully check the endorsement on all checks for possible forgery. The Chief Executive or Treasurer should periodically review cash receipts and deposits on several bank statements.
8. Mail
   The Chief Executive or Treasurer should receive and open the mail occasionally. Stamp all incoming checks “For Deposit Only” immediately. (Your bank will help you design the stamp.)
9. Journal Entries
   Thoroughly review all journal entries and be alert to a large number of unnecessary entries.
10. Vacations
    Vacations should extend at least two weeks per year. This allows the substitute an opportunity to review daily procedures.
11. Automation
    Off-the-shelf software often has some built-in controls. Be certain to make back up copies of the accounting records and store them off the premises.
12. Losses
    Should you become aware of embezzlement, call the police immediately and notify the insurance company.
13. Hiring Practices
    Check references and have each new employee complete a special bond application. Also, order background checks to be completed.
14. Inventory
    Inventory “shortage” is specifically excluded by most employee dishonesty policies. An annual inventory will, however, give rise to evidence that theft may be taking place. When used with other evidence, this may lead to reasonable suspension of dishonest acts taking place in the firm. An annual inventory of all property should be conducted as a loss prevention technique.