BizLawBuz …. The Power of Know

This week’s featured topic is provided courtesy of Wright Penning & Beamer client and friend Tom Buck. Thanks, Tom, for sharing this insightful piece.

Eight Practices to Protect Your Corporate Cash

by JT (Tom) Buck
an old entrepreneur

Recently, a very good friend had the unfortunate situation of an employee embezzling funds from his company. This was not sneaking an extra $20 onto an expense report. It was a concerted effort over a long period of time to steal and hide the misappropriation of large sums of money.

The employee had literally stolen several thousand dollars per month over several years. The embezzlement was hidden in legitimate looking, duplicate vendor invoices, checks which were signed by an authorized signer; which then were altered on the payee line. The volume of checks and invoices handled on a monthly basis obscured the false transactions. My friend was shocked at the behavior of this trusted employee. He was fortunate that insurance provided a partial recovery and that the company’s long-term prospects for success were not harmed once this was discovered. However, the loss, the effort for recovery, and the damage done to their culture of trust was extreme.

My friend is a very smart and trusting man. This led to the success of the thief for many years, yet, following this experience, several financial procedures in his company were changed to prevent a future occurrence of this type of theft. This story and the following practices were gathered from a review of best practices as recommended by two leading CPAs in Southeast Michigan and are shared for the benefit of other business owners. If implemented, these practices will greatly reduce the probability of your company having a similar experience.

Practice Number 1 – Disbursement Review
These best practices start with a complete review of all funds going out of the company. This particular practice would have, most likely, prevented the embezzlement at my friend’s company. An owner must review every disbursement item on the bank statement, comparing each item to the related invoices or originating transaction, every month.

Practice Number 2 – Review Endorsements on Checks
For every check written, read the endorsements on the back to ensure they are going where intended. Some banks do not return the paper checks in efforts to become more paperless. This may require viewing the backs of checks on-line.

Practice Number 3 – Review Cash Transfers
Some of your transactions may be through automatic transfers or pre-authorized withdrawals. This practice requires a specific review, every month, of all other transactions involving cash transfers including but not limited to: ACH, Tax, 401k transactions and other payments. Make sure these amounts match the expected payments and originating documents.

Practice Number 4 – Enter all Debits and Credits into the Accounting System
Many times smaller credits or debits can go unnoticed in the busy activity of a month. These can be in the form of a refund on a vendor invoice, or a discount for early payment, or perhaps even a small expense item paid for out of petty cash. These transactions are often not tracked well in the accounting system because they are small or seem unimportant. These debit memos and credit memos must be entered into the accounting system to have accurate accounting and to prevent the possibility of the funds they represent being misappropriated.

Practice Number 5 – Enter all Payables into Accounting
A bill, which arrives the first of the month and is due within the month, may be placed into the payments file and just entered into accounting as an expense opposite a cash payment. To track these fully, they should be entered as an expense opposite (increasing) the payable account, then cash opposite (decreasing) the payable account. Otherwise, payables records will be incomplete.

Practice Number 6 – Follow the Rules
Create a culture of following the financial rules. Contrary to a world where we want to see ‘out of the box’ thinking to improve our products, our services and our relationships with customers, the financial reporting and management arena is one where following the rules keeps bad things from happening. Any deviations from these particular rules should be well understood and documented.

Practice Number 7 – Background Investigations
Establishing the practice of performing background checks on employees who work with the accounting system, financial payments and financial receipts is a way to insure that the people handling these transactions do not have a history of malfeasance. As intrusive as this may feel, it is incumbent on owners, for the success of the enterprise to employ talent with the highest ethics for work in finance and accounting.

Practice Number 8 – Enforce Vacation Policy
The discovery of the malfeasance in my friend’s company occurred while the employee was on vacation and another employee was covering their responsibilities. This points out the wisdom of enforcing a minimum of a one-week vacation per year, with another employee stepping in, for those with financial responsibilities in the organization.

If these eight practices are followed, the likelihood of an employee escaping with corporate funds is greatly reduced. Owners often find having a personal focus on sales and operations to be of the greatest satisfaction as they apply their time and energy in their organization. While delegation of financial responsibilities seems prudent, regular time allocated to these practices will improve the results and security of the company’s resources. The embezzler from my friend’s company is serving time in jail as of the timing of this writing. While this prospective consequence deters most employees from stealing, without the above practices it is possible they could escape.

Thanks to Jim Bauters of UHY Advisors, Inc. in Southfield, Michigan, and to Kevin McKervey of Clayton McKervey, P. C. also of Southfield, Michigan, for their suggestions and contributions to the creation of this article. Thanks also to my friend for being willing to share a terrible experience to help others avoid the problem.

Dirk A. Beamer

New Employer Posting Requirement from the National Labor Relations Board (NLRB)

Starting November 14, 2011, most private sector employers will be required to add an additional notice poster on their breakroom wall. The new poster informs employees about their right to form or join a labor union. Employers can download the poster for free at the NLRB website.

Certain small businesses will be exempt from this requirement since the NLRB chooses not to exercise jurisdiction over companies that have minimal impact on interstate commerce. As a general rule, retailers and home builders that sell less than $500,000 a year will be exempt. Nonretail businesses that provide no more than $50,000 in goods or services to out of state customers – or who buy no more than $50,000 from out of state suppliers – are exempt. But when considering whether something was bought or sold “out of state,” the NLRB looks at is first origin or its ultimate destination. Thus, unless the good or service originates in, and never leaves, the same state as the company, it is part of interstate commerce. Practically speaking, this means most small businesses still fall under the NLRB’s jurisdiction and need to post the new notice.

Dirk A. Beamer

Last week, the Justice Department asked the Supreme Court to review the Affordable Care Act after the United States Court of Appeals for the 11th Circuit (”Court”) ruled the law unconstitutional. In Florida ex rel. Attorney General v. U.S. Department of Health and Human Services, the Court took issue with the Act’s “individual mandate,” which requires that individuals maintain minimum essential insurance coverage or face a monetary penalty. The State of Michigan is one of 26 states in the case seeking to strike down the Act. While this is not the first challenge to the Act, it is so far the only federal appellate court to rule the Act unconstitutional.

Individual mandate exceeds powers
Specifically, the Court found that the expansion of the Medicaid program in the Act was constitutionally sound, but that the individual mandate exceeded Congress’ powers under the Commerce Clause and Taxing and Spending Clause of the Constitution. Despite striking down the individual mandate, the Court did find that it could be severed from the remainder of the Act and therefore did not require invalidation of the Act’s other provisions.

Likely decision during summer of 2012 if reviewed
It is not yet known if the Supreme Court will take the case, although it is likely. In light of the 11th Circuit ruling and the division among the lower federal courts across the country as to the Act’s constitutionality, all sides appear to agree that Supreme Court review is necessary. If the Supreme Court agrees to review the Act, a decision will likely come down during the summer of 2012, with the presidential election only a few months away.

In the meantime, the Act will march on, although little on the timeline for the next year will change the current state of affairs for business and most individuals.

Julie P. Cotant