Chapter 10 -
Installing adequate controls

Sloppy practices in accepting customers, setting credit limits, billing or handling receivables can slow cash flow to a trickle or dry it up completely. But when you hear the words “cash controls,” your first thoughts might be fraud or embezzlement. That’s why accounting controls are important.

According to KPMG Peat Marwick’s Forensic and Investigative Services, 76 percent of U.S. businesses recently surveyed stated that fraud is a major problem. With margins already tight in the trucking business, someone stealing from you could shut you down.

Internal accounting controls are the checks and balances you need to protect assets. If your company has a financial statement audit, consult the auditor’s letter for his commentary on your system. Most companies aren’t audited, however, and audits are not designed to uncover fraud anyway.

How can someone steal from you? Basically, it boils down to two times: when money is coming in and going out.

Suppose Shipper A sends a $10,000 payment, which your employee who receives payments keeps. When Shipper B sends a check for $15,000, the employee applies Shipper B’s payment to Shipper A’s account and, partially, to Shipper B’s account. This process, called “lapping,” can – and will – continue indefinitely.

Or, more simply, company funds are used for purchases that aren’t valid company expenses, such as Christmas gifts for the office manager’s family.

What minimizes the chance for embezzlement and fraud? A reliable controls system – both the appearance of one, and the reality of one – is the answer. By appearance, we mean that someone appears to be checking on things, even if no one really is. This is a minimal control system. A better one is designed around understanding how fraud or embezzlement occurs and stopping it before it starts.

Fortunately, many small businesses – particularly family-run companies – have an advantage over larger companies. Often, the person who handles the money is a part – or future – owner of the business and is, therefore, less likely to hurt the company. But fraud does occur, even in close-knit families, so it’s only smart to take preventive steps.

Three conditions
Fraud can thrive when any one of these three conditions is present: (1) need, (2) rationalization and (3) opportunity.
Need can be real or perceived, and the rationalization can be as creative and different as people are. Finally, discovering the opportunity and eliminating it are the major conditions that controls will tackle. By working with your CPA firm and being mindful of these in your own business, you can prevent most of these problems.

Worksheet 10-1 is a list, developed by KPMG Peat Marwick, of red flags that might alert you to a potential fraud opportunity or reasons for a need. And below are some common rationalizations. Only one of these conditions has to be present for you to be at risk.

Common rationalizations

1. “I’m just borrowing the funds.”
2. “I deserve it — I’m underpaid and underpromoted.”
3. “I’m not hurting anyone — the company and owners are rich.”
4. “Others are doing it — either the boss or other employees.”

Most small trucking companies probably experience some of these red flags – and potentially are ripe for crime. If you have a large number, consult a CPA for steps you can take to improve your systems.

Watching these red flags is one way to hinder fraud. Sound management principles and internal control systems are the only ways to reduce your chances of becoming a victim.

Safeguarding cash
Methods of safeguarding cash can be classified in four categories:

1. Personnel controls
2. Segregation of duties
3. Authorization and verification of transactions
4. Timely documentation

Personnel controls
One way to minimize fraud is to control your hiring practices. Adopt procedures that increase the chance of hiring honest drivers and employees. Paying fairly and being a decent boss go a long way, too. A well-paid employee is less likely to steal.

For key cash-handling positions, consider a criminal and civil background check. Require employees to take vacations and have other employees perform the duties of those employees in their absence. Fraud often requires the physical and daily presence of the perpetrator to keep it going.

Segregation of duties
This type of control defeats opportunity by limiting physical access to money and records of that money. If someone opens the mail, stamps “For Deposit Only” on the back of each check and then prepares a list, the next person entering them in the A/R records cannot take a check without leaving a discrepancy. If the same person performs these jobs, there is an opportunity for fraud.

On the disbursements side, don’t let the same person authorize new employees and payroll expenditures. If your company is large enough, he could set up a fictitious employee and pocket the wages. The same could be true for setting up and paying phony vendors.

Small companies with limited personnel can use what’s called mitigating controls – cross-checking procedures that provide virtually the same protection as segregating duties. You could compare your dispatch log with your invoices to ensure that each load was billed.

The easiest way to segregate duties is to outsource part of the process. Have an outside accountant reconcile your bank statements for you.

Lock up the checkbook. To limit access, don’t authorize the same person to write and sign a check. Don’t allow unused checks to float around the office. And never give the co-signer a signature stamp unless you’ve checked out the procedures carefully with your auditors.

Authorization and verification of transactions
Don’t give any employee sole discretion over all transactions and consider internal auditing procedures, such as randomly verifying drivers’ fuel consumption. Randomly audit drivers’ use of the fuel card. Auditing these transactions can uncover schemes. Many fuel cards let you restrict drivers to certain transactions and to certain levels of spending.

For the office, consult an accountant for a checklist of common control and authorization procedures. The ultimate financial control for authorization is an annual budget with weekly or monthly examination of variances.

Timely documentation
Another layer of controls involves requiring uniform and timely documentation in support of company purchases. Require drivers to turn in receipts every week or after each haul – and go after abusers vigorously. The longer you wait, the easier it can be to cover fraud. Pay all bills by check. Checks can be traced and recorded; cash easily is slid under the table.

Deposit cash the same day it is received. Promptly reconcile your bank accounts and use prenumbered documents so you’ll know when one is missing.

In Summary
By working with your company accountants and outside CPA firms, you can set up procedures that will reduce the chance that employee dishonesty will hurt your cash flow.