Over the past several months, I have been working with small business owners who have been victimized by their office managers. The office manager was able to steal from them as the individual was trusted and given too much control and access. The office manager recognized this internal control weakness and exploited it.

So, how did many of these business owners end up needing my services?  How did they become victims within their own organization?

Trust and a Lack of Segregation of Duties
Many small business owners develop a relationship with their office manager beyond the office. They trust their office manager and rely heavily on them day to day. The owner functions with blinders on. He or she cannot fathom being a victim and trusts the office manager, forgetting to structure the office hierarchy by implementing segregation of duties when at all possible.

Business owners should not allow one individual to have access to everything. The business owner must maintain part of the office administration to a degree. This course of action will create good checks and balances.

Pays Personal Expenses on Company Dime
Some office managers aren’t shy about putting their hand in the company cookie jar. They will blatantly pay their personal bills or write checks to themselves directly out of the business checking account. When at all possible, implement segregation of duties to deter this situation from occurring.

If an organization is too small to separate the check writing function, the signing of the checks and the bank reconciliation, I suggest that the owner ask the bank to mail the monthly statement with copies of the canceled checks to the owner’s home. The owner can then review the original bank statement and scrutinize the monthly disbursements. The owner should always inquire about a few checks per month so that the employee knows the owner is monitoring disbursements.

Credit Cards
Credit cards can be a bad thing for small businesses. Limit the number of employees who have credit cards. Company policy should stipulate that employees always maintain possession of the business credit card and never loan it to anyone. Furthermore, the policy should indicate that if an employee loans the company card to others or charges personal items on the company credit card, the individual will be terminated.

If an office manager has a company credit card, do not give him or her authorization to review the monthly statements and authorize the payment. To ensure the segregation of duties, the owner may have to take on this task in order to deter fraud from occurring.

Company policy should require detailed receipts to be maintained for accounting records of items charged on the credit card. With so many one-stop shopping stores, it is difficult to determine if purchases are legitimate business expenses without the detailed cash register receipt.

Payroll
When an organization uses an outside payroll company to process payroll, the owner often assumes that fraud can’t occur because the office manager doesn’t write the payroll checks. However, in most companies, the office manager has the authority to direct the payroll company and provides them payroll information every week. The office manager usually relays information about bonuses and pay increases. In most cases the payroll company has been authorized to deal with the office manager so the provider doesn’t follow up with the owner to confirm that the transmitted information is accurate and authorized. What’s to stop the office manager from giving himself or herself an extra bonus or a pay raise? Nothing. In small organizations, the owner should either call in the payroll or be available to the payroll company in order to verify that the information provided is accurate.

Theft of Cash Receipts
Cash is the most appealing asset to steal because unlike a check it doesn’t need to be converted. The office manager accepts the payment from a customer but doesn’t record the payment. He or she pockets the money instead. In order to deter this situation from occurring, all customers should be given receipts.

Larceny is another scheme office managers employ by stealing from the daily receipts before the money is deposited in the bank. I frequently see this in the medical industry where the organization has a stand-alone billing system. The billing system is never reconciled to the accounting system, thus making it easy for the office manger to steal from the daily deposit. If your business uses a stand-alone billing system, the billing and accounting systems need to be reconciled regularly.

Adequate Dishonest Employee Coverage
During our investigations, when we determine that the owner is a victim of fraud, it is not unusual to find that the insurance policy does not include dishonest employee coverage or that the coverage levels are inadequate. The insurance policy should be analyzed once a year to determine if the coverage levels are adequate.

Not all fraud can be prevented but there are ways to reduce the business losses. If you have additional questions or concerns regarding fraud, please contact me.