Bernie Madoff: embezzler, thief and downright cheat. It is now common knowledge how the once trusted and revered 70-year-old scammed his investors out of billions of dollars, proving that a friendly face can actually be the face of fraud. While his lies quickly unraveled to reveal one of the most infamous Ponzi schemes in history, people were thankful that it was not happening to them.
Such scammers and cheats not only exist on Wall Street; these perpetrators also coerce and connive right here in Silicon Valley. In the past two years alone, two clients have engaged Ravix Group to investigate possible embezzlement. One of the cases led to the arrest of the guilty party, proving that misappropriation happens more often than we think. Employee theft can be embarrassing, and worse, it drains the much-needed funds of a start-up company.
So what can you do to prevent such losses?
First step: review your hiring practice. Criminal and civil background checks should be performed for all hires, particularly those who work in accounting. If the aforementioned client had taken this precaution, he would have discovered the perpetrator had a long wrap sheet and been forewarned of his illegal activities.
Consider purchasing employee dishonesty insurance. Some property insurance policies include a small amount for employment dishonesty, usually ranging from $25,000 to $100,000, but you need to confirm with your insurance broker if your policy contains this. If not, employee dishonesty insurance is usually very inexpensive.
Require two signatures on checks and wire transfers for large disbursements. Multiple signatures diminish the likelihood of collusion.
If your company is already in the revenue stage, consider having payment receipts deposited in a lockbox so that the checks do not pass through the hands of an employee. If a lockbox is not used, an independent person should review accounts receivable monthly and investigate any bad debt write-offs.
Only executive officers of the company should have signing authority. Discourage companies from authorizing their office manager to have any kind of signing authority over cash.
Ensure that bank statements are reconciled and reviewed each month by a person who does not have cash receipt or cash disbursement access.
Require employees to take a vacation at least once a year. In a situation with one client, the former bookkeeper never took vacation. She came into work early, left late and always kept the records locked in a drawer, inaccessible to even the company’s president.
Lastly, if embezzlement is suspected and your local law enforcement is not interested in the case, contact the Federal Secret Service. This agency was initially created to investigate counterfeiting, not to protect the President.
Encourage clients and colleagues to follow these guidelines, to evade potential embezzlement and promote employee trust. By utilizing straightforward techniques, the Bernie Madoff’s of the world can ultimately be avoided.