“We Trusted Her!”

by Nicholas Walsh, PA


Those three precautions
will prevent most


Nearly every week I read of a small Maine business, or a Maine non-profit, which is the victim of embezzlement. And nearly always the managers or board members utter the same pathetic words: “We trusted her!” (Or him.)

Small business embezzlement is a big problem, and it really does happen all the time. The average take is said to be $149,000.

In a big business, various accounting functions are separated. One employee may write checks, but another prepares deposits, and perhaps a third reconciles the bank accounts. In a small business, however, too often a single employee opens the mail, prepares bank deposits, writes checks (and perhaps even signs them), and balances the accounts. That’s an invitation to theft.

If I’ve described your business, or if you serve on the board of a non-profit which employs a similar practice, here are some ways to avoid getting ripped off.

First a word about non-profits. When my kids were in little league the volunteer bookkeeper was discovered to have stolen $8,000 from the club. There were simply no “controls” at all, as accountants call fraud prevention measures. The responsibility for this theft fell squarely on the board of directors. Each member of a board of directors has a fiduciary duty to make sure the organization’s funds are accounted for. If you are on a board and you have no idea what financial controls exist for the organization, make financial controls Item One on the next agenda and get some controls in place, or shame on you.

Here are some simple things you can do to prevent employee fraud.

Even if your financial department consists of a single employee, separate out some of his or her responsibilities. Instruct the bookkeeper that he is never to open a bank statement or a communication from a taxing agency. (When embezzlement drains a business’s cash, tax liabilities often go unpaid.) Opening such envelopes is solely to be done by some other designated employee, perhaps yourself. (That’s how I do it.) And the person who opens the statements must at least review the check copies for forged signatures, and scrutinize any wires or electronic transfers. Similarly, the bookkeeper may prepare checks but may not sign them.

Those three precautions will prevent most embezzlements. The mere fact that you are insisting on those measures will discourage most employees who are contemplating straying from the straight and narrow.

Other embezzlement schemes are more complex and harder to prevent. For example, an employee might divert deposits to a new bank account which she sets up and treats as a slush fund. Prevent this by knowing what customer payments have been made and tracing them to a proper deposit – not necessarily every deposit, but at least a random sample every month or two.

An employee might create false invoices, and pay them to an account controlled by the employee. Prevent this by knowing the business, but also by every now and again tracing a random transaction backward from payment to invoice to goods or services your business received. Again, by doing this every few weeks you will greatly discourage the tempted employee.

Cash is a problem. Insist on receipts, and the receipts must be numbered sequentially so a missing receipt can be accounted for. If at all possible, one employee totals the receipts while another totals the cash in the till. If typically one employee does both, then at least every few weeks, on a random basis, audit the work yourself. Stay involved and look over shoulders and check the work. When managers do these pop-up audits, employees stay honest.

Employees may grouse, and complain of not being trusted. Remind them of what Ronald Reagan said of negotiating with the Soviets: “Trust, but verify.”

Stay out of trouble.

Nicholas Walsh is an admiralty attorney with an office in Portland, Maine. He may be reached at 207-772-2191, or nwalsh@gwi.net.