Stop Fraud Before It Starts: Essential Internal Controls for Small Businesses

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Delegate CFO: Hello, everyone.

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Delegate CFO: Welcome to today’s webinar about internal controls.

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Delegate CFO: Now, this particular webinar is near and dear to my heart, because as many of you know, not only am I the owner of Delegate CFO, I also own another company, HublinForensic.com.

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Delegate CFO: And on that side of my companies, that’s where I do my forensic investigations. I investigate fraud, embezzlement, so on and so forth.

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Delegate CFO: And unfortunately, in that particular company, I’ve seen a lot of small businesses lose quite a bit of money, and mainly it was because of

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Delegate CFO: either lack of internal controls or not understanding internal controls. So…

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Delegate CFO: The best forecast budget you could possibly have

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Delegate CFO: won’t amount to anything if somebody’s stealing from you. So that’s why I felt it was important to go ahead and do this particular webinar, to go over what intercontrols are, what’s the importance of them, how much… what’s the cost of not doing them, and then what you can do as a small business owner to have those in place. And again.

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Delegate CFO: Turn controls are crucial for your small business, because all the work you do could instantly evaporate from somebody just stealing from you. So, let’s go ahead and jump into the respective

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Delegate CFO: Webinar. So again, we’re going to talk about stopping fraud before it starts, and the essentials of these particular internal controls.

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Delegate CFO: Again, my name’s Steve Holland, I’m a CPA, as well as a certified forensic accountant.

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Delegate CFO: I’ve been a CPA since November of 2000, and I’ve been doing fraud investigations for almost 15 years now, and I’ve testified both in civil cases and criminal cases.

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Delegate CFO: And so, today, we’re going to cover

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Delegate CFO: What are internal controls, why do they matter, and what’s the impact that, say, poor internal controls can have on your particular company?

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Delegate CFO: First off.

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Delegate CFO: I wanted to kind of give you some statistics from the Association of Certified Fraud Examiners. So, why do internal controls matter? Well.

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Delegate CFO: If you want to know what the effect of fraud… what the effect of fraud has on companies, Google Report to the Nations. Now, that’s a report that’s done every other year, so every two years. The ACFE puts out this report. It’s a very detailed report, you know, it’s got very nice graphics.

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Delegate CFO: And it goes through every single fraud that you could possibly have, whether it’s misappropriation of assets, which is more or less

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Delegate CFO: theft of cash, to inventory theft, to financial statement fraud. It breaks all that down. And then it breaks it down by respective regions, companies.

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Delegate CFO: male, female, so it breaks all that information down. It’s very, very helpful, and it’s very insightful when you go through and review that. But some of the statistics that are really applicable to our presentation today are here on the screen.

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Delegate CFO: From their report, 51% of fraud in small businesses is due to lack of internal controls or override of controls.

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Delegate CFO: And a lot of times, the override of controls, you can just think of as lack of controls, because if somebody’s ever able to override the controls, they’re really not in place to begin with.

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Delegate CFO: So think about that. Over half of fraud happens because there’s no controls in place.

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Delegate CFO: Small boot businesses

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Delegate CFO: lose, on average, 5% of annual revenue. Now, that is a huge number, and I’ll explain why. We’ll walk through that particular 5% here in a second.

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Delegate CFO: But that’s, on average, 5% of annual revenue to fraud.

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Delegate CFO: Median loss, 120. Typical fraud lasts about 12 months before detection. Again, depending on that particular statistics, it depends on how long the employee’s been with the company. Long-term employees, their fraud tends to go a lot longer before they’re detected, but on average, it’s about 12 months before detection.

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Delegate CFO: And turbo controls are not just for big companies. They are for small businesses, as well. So…

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Delegate CFO: Let’s go take a closer look at that 5% of annual revenue.

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Delegate CFO: So right here on your screen, …

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Delegate CFO: I took this from just a news article in Google, so if you have time, I suggest you go into Google, you type in bookkeeper fraud, hit enter.

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Delegate CFO: And there’ll be a whole bunch of stories, and there’ll be quite a few stories.

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Delegate CFO: Month later, two months later, do the same thing. There’s going to be a whole bunch of news stories. So, this fraud happens, it happens quite a bit. So, I just went in, typed in bookkeeper fraud, found this particular article, and this is actually a snippet from that article, and I’ll read it verbatim for you, because it’ll have importance to what we’re going to discuss.

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Delegate CFO: Said Janelle Klein, prosecutor for the Conference of District Attorneys, which represented the state in the case. Some of the owners were using their own money to keep the business afloat and folks employed, believing the company wasn’t profitable, when all the while the problem was Ramos embezzling the funds.

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Delegate CFO: Now, keep that in mind. We’ll come back to that screen, but let’s keep that in mind, so…

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Delegate CFO: Again, on average, 5% of annual revenue is…

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Delegate CFO: taken due to fraud. So let’s do a real quick mathematical calculation so you kind of get an idea as to what this is.

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Delegate CFO: So, on your screen, I just have a very generic company. Said they have a million dollars in revenue, $600,000 in cost of goods sold, $350,000 in operating expense, net income, $50,000.

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Delegate CFO: You’ll notice that net income, the $50,000, represents 5% of revenue. So, in other words, that 5% of revenue is $50,000,

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Delegate CFO: But it also happens to equal the net income.

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Delegate CFO: So, most companies, especially small businesses, your net margin, which is your net income divided by revenue.

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Delegate CFO: it hovers around, say, 5% to 15%. You know, obviously, depending on your industry, you could have a larger percentage, but it’s really the percent of net income

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Delegate CFO: Divided into sales is your net margin.

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Delegate CFO: And in this particular situation.

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Delegate CFO: It’s equal to 5%, the net income of $50,000. Well, that’s 5% revenue right there.

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Delegate CFO: And the more important thing to consider is

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Delegate CFO: When an employee steals from you, even though that previous slide… previously slide said that it was 5% of revenue.

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Delegate CFO: A lot of times, they’re stealing your net income.

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Delegate CFO: Because, at the end of the day, you still have to pay for your cost of goods sold, so you have to pay for your inventory, you still have to pay your operating expenses, so you got your rents, you know, interest on your note, etc. You still, as an owner, have to pay that. So when they’re stealing 5% of your revenue, they’re really stealing your net income.

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Delegate CFO: On there. And another way to think about this is…

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Delegate CFO: when somebody steals from you, again, they’re more or less stealing from your net income. We’ve established that part.

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Delegate CFO: For you to recover those funds that they stolen, you have to have the amount of embezzlement.

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Delegate CFO: divided by the net profit margin. In this case, $50,000 divided by 5%, it’s going to be a million. So just to recover the amounts that they stole, you’re going to have to recover, or have additional sales on top of everything else of a million dollars. So let’s go back to our previously slide.

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Delegate CFO: again, I won’t read the whole thing, but where she said, some of the owners were using their own money to keep their business afloat, believing the company wasn’t profitable, when all the while the problem was Ramos embezzling the funds.

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Delegate CFO: Again, that 5% of sales.

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Delegate CFO: In this particular situation, this Ramos lady, she was stealing from the net income.

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Delegate CFO: And I’ve seen this several times.

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Delegate CFO: Where owners of a company, where they had embezzlement.

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Delegate CFO: they had to fund the company. They had to do a capital call, or had to take out a line of credit. And so, a lot of times, they don’t know that they’re being stolen from.

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Delegate CFO: And again, like in this situation, this is not uncommon, where the company thought they weren’t profitable. In reality, it was just that lady was stealing the funds. And again, when you see that number, 5% of revenue.

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Delegate CFO: You need to think of it more of.

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Delegate CFO: that’s all the net… they’re stealing from your net income. And however much they stole, I then need to take my profit margin and divide that into that respective number. And so, going back.

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Delegate CFO: To calculate, again, just to reiterate, to calculate the amount of revenue needed to recover stolen funds, you need to take the total funds embezzled and divide by your net profit margin. And again, embezzle funds, divide by net profit margin. Key point here.

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Delegate CFO: If your net profit margin is lower.

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Delegate CFO: Then, say, standards say it’s 2%.

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Delegate CFO: then you’re gonna need to generate much more sales to make up for that cash investment. So, conversely, obviously, if you have a very high net margin percentage, then you won’t have to bring in as much sales, but you’ll still have to bring in that. And

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Delegate CFO: when I’m saying bring in more sales, this is above and beyond what you’re already budgeted. So in this, you know, in our previous slide, we look at that, you know, if…

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Delegate CFO: This lady stole, or this person stole $50,000, and that’s their net margins, 5%, so obviously they need to generate a million dollars just to make up that revenue.

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Delegate CFO: Let’s say they already budgeted for the year for 2024 $1.5 million.

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Delegate CFO: So that means for them to get back to where they originally wanted to be at the end of 2024,

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Delegate CFO: They have to have $2.5 million in sales, and that’s just to get to the cash basis that they were projecting to have.

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Delegate CFO: Because keep in mind, when you do your budgets and your cash flow, you’re budgeting actual cash coming in to more or less pay for the company, pay for expenses, etc. Again, goes back to this slide. Company wasn’t believing they were profitable, because she’s stealing from the bottom line, so…

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Delegate CFO: That is a key point to understand, is when you see something like statistics of 5% revenue.

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Delegate CFO: That lady or those people are stealing from your respective bottom line.

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Delegate CFO: So… fraud. Now.

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Delegate CFO: You’ll hear the term fraud triangle, so if you go into Google or type in fraud triangle, you’ll actually see all sorts of images of, literally, triangle.

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Delegate CFO: And what the premise of the fraud triangle is, is you need all three sides of the triangle to have fraud happen. A lot of times when you see the picture, you’ll see the…

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Delegate CFO: The pyramid, and then you’ll see fraud stuck in the middle.

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Delegate CFO: A better way to think about it is, instead of a triangle, think of it as a three-legged stool.

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Delegate CFO: So, in order to get, you know, and if we say the seat itself is actual fraud. So, in other words, the half fraud happen, we need those three legs.

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Delegate CFO: And the three legs of a fraud triangle, or three-legged stool, are motivation pressure, rationalization, and perceived opportunity. Now, you’ll hear different descriptions of it, but these are really the three key areas.

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Delegate CFO: Motivation and pressure

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Delegate CFO: That is usually when somebody feels like, you know, they have a lot of medical bills, so they need to get those covered, or, you know, they want to stay at the country club with all their friends, but it’s very expensive, but they don’t, you know, they don’t want to be on the outs with all their friends there at the country club.

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Delegate CFO: Or, you know, all our friends are going to Vegas, you know, once a quarter, and so they feel like they want to go to that.

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Delegate CFO: There’s usually some sort of motivation or pressure behind somebody who commits fraud. You know, there’s something there that’s causing them to want to do that.

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Delegate CFO: Rationalization.

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Delegate CFO: Rationalization is predominantly

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Delegate CFO: if I’m an employee, and I feel like I worked a ton for the company, but they didn’t give me a bonus. Well, I may rationalize, I deserve a bonus because I work harder than so-and-so, or I deserve a pay raise because I’m actually doing two jobs, you know, when so-and-so left.

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Delegate CFO: So, rationalization is how somebody rationalizes they should commit fraud because of XYZ instance.

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Delegate CFO: And the last item, perceived opportunity. Now, perceived opportunity is where this, is where you have internal controls.

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Delegate CFO: If I’m a scrupulous person, and then I’m trying to steal, and I know that the owner never looks at the bank statements, never looks at the income statement, just occasionally shows up, you know, writes himself a check for disbursement, he’s not really there, nobody really looks over that.

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Delegate CFO: in my mind, if I’m committing fraud, I see there’s an opportunity here, because nobody’s going to catch me. Nobody’s looking at my work or anything like that.

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Delegate CFO: And so that’s really where the internal controls are. So, back to the three-legged stool. You need all three of these items to have fraud happen.

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Delegate CFO: Now, you can’t control the motivation and pressure.

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Delegate CFO: You know, somebody’s wanting to be at the country club with their friends, you can’t control that.

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Delegate CFO: Rationalization. Now, you can talk to an employee about how, you know, great and valuable they are.

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Delegate CFO: But you can’t control how they’re rationalizing, hey, I should have a bonus, or I should get paid more than so-and-so type situation. You can’t control that.

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Delegate CFO: But you can’t control perceived opportunity, and that is your internal controls. So if you control that perceived opportunity, you more or less have removed that leg on a three-legged stool, and what happens?

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Delegate CFO: it falls over. And so… and then you don’t have fraud happen. And so that’s why it’s key, even though when we talk about fraud triangle, I can think of it as a stool, and the one area that you can definitely control is your… the perceived opportunity. So, let’s get into…

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Delegate CFO: The main basis, or the main, foundation for internal controls.

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Delegate CFO: So, a lot of you have probably heard that

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Delegate CFO: With internal controls, you have what’s called segregation of duties.

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Delegate CFO: And segregation of duties is really broken down into four main areas. Authorization, custody, recording, and monitoring.

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Delegate CFO: Now, authorization, just like the name says, that’s the ability to authorize a transaction, whether it’s authorized to sign the check, or authorized to, do a purchase agreement, or purchase product from a vendor, you have some sort of ability to authorize a particular transaction, or even sign a lease agreement.

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Delegate CFO: Custody of assets. Again, 20 years ago, this was predominantly centered around who has custody of the actual checkbook.

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Delegate CFO: But today, it’s really who has access to the bank statement, electronic funds, or EFTA funds, who has access to the actual physical documents.

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Delegate CFO: Who has access to the… by physical documents, the actual checks, and who collects payments? You know, that’s an asset. So who has custody of these particular assets?

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Delegate CFO: Recording, again, who records the transaction into the accounting records? You know, into QuickBooks Zero, what have you. Who does the actual recording of the transaction in there? And then monitoring.

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Delegate CFO: Monitoring is where you’re reviewing

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Delegate CFO: all the processes, you know, reviewing that transaction, is this transaction correct? Reviewing that journal entry. You’re monitoring and or reviewing the bank reconciliation. So you’re performing a review level. You’re not doing all these particular steps, but you’re going back and reviewing all that. Now, of all these duties.

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Delegate CFO: Let me take a step back.

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Delegate CFO: In the textbooks that you see in college, they always say that you have one person in each one of these areas. One person does authorization, another person has custody, recording, monitoring.

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Delegate CFO: In the real world, that’s not feasible for small and medium businesses. You can’t afford to have literally one person in every single area. Now, as a small and medium business, a lot of times, some of these duties are intertwined with the same person.

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Delegate CFO: However…

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Delegate CFO: as the owner, executive management of your company, that monitoring function should never leave your, grasp. You should be the one that does that. Not only has the ability to do it, but you should be doing it consistently. Because most frauds that you see, again, if you go and type in bookkeeper fraud.

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Delegate CFO: If you read those stories.

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Delegate CFO: one, I suggest you look at this particular slide when you read those stories to see, you know, okay, who had authorization, who had custody, etc.

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Delegate CFO: But the monitoring is usually why that fraud happened, because they were… the controls were not being monitored, cash wasn’t being reviewed, bank statements weren’t being reviewed. And so, of all these controls.

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Delegate CFO: That monitoring function should stay with you, the owner, or executive management.

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Delegate CFO: No.

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Delegate CFO: Again, like we just mentioned, if one person has access to all four areas of the segregation of duties.

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Delegate CFO: Then the business will be ripe for fraud.

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Delegate CFO: Go back, do your Google search.

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Delegate CFO: I can almost guarantee every single one of those, there was a situation where that person had access to all four, or they had access to three, but the monitoring was never being done by the other person, so…

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Delegate CFO: de facto, they had access to all four. So, if somebody has access to all four of those items, you are heavily ripe for fraud in your organization.

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Delegate CFO: So what are internal controls?

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Delegate CFO: Internal control is really…

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Delegate CFO: Are going to be your policies, procedures, and systems that you have to protect your assets.

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Delegate CFO: One way to think about it, and I’ve done presentations before for businesses that are going through incubation centers.

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Delegate CFO: is… imagine if you took your wallet. You know, let’s say you have, you know, $500 cash in there, you’ve got several credit cards in there. Would you take your wallet, if you were, like, in a classroom setting.

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Delegate CFO: Put it down on a desk, walk away for a couple hours, and then come back and expect all your cash to be there, your wallet to be there.

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Delegate CFO: Probably not, and you probably wouldn’t do that.

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Delegate CFO: That’s the same thing that happens with your business when you don’t have controls in place. You’re really doing that.

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Delegate CFO: And so, back to what are internal controls. They’re really policies and procedures designed to protect your assets. You know, they’re designed to prevent or detect and respond to errors or fraud. And errors do happen, so don’t… anytime something is out of whack.

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Delegate CFO: Don’t immediately assume fraud, because sometimes they’re, you know, we’re all human, so we, you know, could mispost something.

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Delegate CFO: The key elements, obviously, are the segregation of duties, authorization process, checks and balances. So, back to that first bullet point.

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Delegate CFO: Policies, procedures.

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Delegate CFO: You want to make sure you detail out that, because a lot of times what you’ll find is if you have to write out a memo saying, you know, this is what this person does, this is what that person does, you start realizing.

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Delegate CFO: Jane actually has access to all these areas, and you don’t really realize that until you start printing it out.

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Delegate CFO: But when you put those policies and procedures in place, you then set up the structure for your company, because all companies have turnover, even in your county department. You know, people retire, lead to another job, termination, what have you.

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Delegate CFO: When you bring that other person in, you want to have those policies and procedures in place to be able to identify, or be able to have them know what their control processes are.

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Delegate CFO: And just a side note, on my forensic side of my company, when I do an investigation.

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Delegate CFO: one of the first things I do, I mean, obviously, there was an incident that happened for, you know, the particular companies to give me a call to begin with.

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Delegate CFO: But one thing I’ll do is, I will just sit down with them, and I’ll just document what their controls are, in just a memo form.

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Delegate CFO: reason being is that will then lead me to understand, okay, there’s a weakness here, you know, this, you know, Jane had access to the cash, you know, didn’t, you know, no bank recs were done, nobody monitored that, so I’m looking at cash.

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Delegate CFO: Whereas, you know, Fred may be doing the payroll, but Jane was HR, and she did the payroll rates, but Fred just did the payroll. I might not be as concerned on ghost employees on that situation, so…

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Delegate CFO: Writing it out will help you identify where your weaknesses are, and then you can, from there, start molding what your controls need to be.

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Delegate CFO: Now, what is the cost of doing nothing?

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Delegate CFO: Obviously, as we already noted, Lost that income.

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Delegate CFO: People steal from you, they’re gonna steal from your bottom line. So, right there, there’s lost net income.

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Delegate CFO: The other cost? Attorney fees.

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Delegate CFO: So you catch somebody committing fraud.

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Delegate CFO: odds are you’re probably going to go after them civilly. Hopefully, you also go after a criminal, and we’ll talk about that in a second, but if you’re going after civilly, you’re going to need to go and get an attorney, preferably one that can do litigation, and you’re going to have costs for the attorney fees.

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Delegate CFO: forensic accountant. You’re going to have to pay for an expert to go through, because if you go to court, obviously, civil, you need to have some sort of report indicating, here’s the total amount of

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Delegate CFO: Funds that were stolen, this is how she did it, this is, you know, over this time span, etc, etc. So you have to pay for a forensic accountant to go through there.

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Delegate CFO: So those are all just actual monetary fees. Now, you’ve got your own time spent on investigation, meetings, court dates. You know, you’ve got to meet with the attorney to go through it, so that’s time out of your day. You know, you’ve got to meet with… if you’re doing criminal, you’ve got to go down to the police department and meet with the detective, so that’s time out of your day.

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Delegate CFO: We go to court.

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Delegate CFO: Both civil and criminal, you know, you’re probably going to be in court for a while, so all that takes up time, not only the actual meetings themselves.

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Delegate CFO: But a lot of times, you have to prep for those meetings, and so you’re going to have that as well. So all that is just your own personal time that you could be spent working on the company. You’re now being spent on doing this. Possible lost revenue and opportunities. Obviously, you know, lost revenue could be if…

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Delegate CFO: the bookkeeper was stealing accounts receivable, and you call up your best customer and say, ask them why they haven’t paid, and in reality, they actually had paid, and you just alienated your best customer, and they might not do business with you again. So, you know, there’s always that possibility. And then, of course, opportunities.

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Delegate CFO: You know, if they’re stealing from you, again, they’re stealing your net income, so you don’t have that extra cash to, you know, expand your warehouse to be able to offer more products or…

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Delegate CFO: quantity of product, or hire that next programmer to come in for your SaaS company, you’re going to lose those opportunities, because you just don’t have the cash to be able to do that. Personal assets.

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Delegate CFO: Now, I’ve seen this a number of times, if you recall back on our previous slide, let’s go back to that real quick, on, …

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Delegate CFO: that quote.

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Delegate CFO: Where it said.

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Delegate CFO: But even the company was profitable, when all the while, the problem was Raimel’s investment funds. You know, the owners were putting their own personal money in there.

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Delegate CFO: I have seen a number of times where a particular owner,

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Delegate CFO: Has had to sell their own personal assets to keep their company going.

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Delegate CFO: They believed their company was failing, they didn’t want it to fail, so they had some investment assets, I believe it were rentals that they ended up selling. I think one guy ended up selling his boat, selling a car, you know, so that then they had the funds to keep their company afloat.

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Delegate CFO: And this is all because a fraud happened. In this particular situation, this individual, this owner, had had this personal asset in the family for quite some time, and ended up having to sell it.

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Delegate CFO: And he shouldn’t have had to sell it, because this lady had stolen from him. And recovery is highly unlikely. This is part of the cost of doing nothing.

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Delegate CFO: Most of the time, from what I’ve seen, is when an employee embezzles, there’s a particular employee embezzlement.

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Delegate CFO: They usually use the money on items that aren’t tangible.

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Delegate CFO: And by that, I mean they’ll take a trip to Italy. You know, they’ll go on a Caribbean cruise. They’ll go to Vegas and gamble a whole bunch.

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Delegate CFO: So they’re using all that money, but they’re not buying physical assets. It’s not like they’re buying Bitcoin or real estate. They’re just using it and blowing it on stuff that can never be recovered. And then conversely, if they do buy an asset.

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Delegate CFO: Oddly enough, they don’t take good care of that asset. So I’ve seen situations where individuals bought, you know, either high-end pickup trucks or luxury cars.

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Delegate CFO: And they just didn’t take care of it. It was just all beat up by the time we got to the fraud and collections standpoint.

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Delegate CFO: And…

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Delegate CFO: I… just based on the small sample I’ve seen, for some reason, when people commit fraud and they buy a personal asset, I believe it’s probably because it’s… they weren’t… they didn’t have to earn the money to get that asset, so they have very… they don’t care for the asset as well as most people would.

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Delegate CFO: So, that’s one of the things to keep in mind. Again.

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Delegate CFO: They may have bought a physical asset.

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Delegate CFO: But it’s probably all torn up. So, recovering of what they stole is very highly unlikely. Again, you can get a judgment and start collecting, but

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Delegate CFO: how much you’re going to collect and how long that period is, that’s going to be up in the air. One thing I will add to this, it’s not on this slide.

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Delegate CFO: Usually when… You catch somebody committing fraud, embezzlement.

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Delegate CFO: they will only admit to what they think you know. And I’ve seen statistics that

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Delegate CFO: Usually, you know, whatever they tell you, you need to multiply that by, I believe it was, like, 5 or 6.

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Delegate CFO: Because they’re not gonna admit to the full amount. They’re only going to admit to what they think you know, that they stole.

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Delegate CFO: The other aspect is, and I’ve seen this before, sometimes I don’t even know how much they stole. You know, I had one case where an individual had been stealing from this company for at least 12 years, probably more. We didn’t have enough records to go back any further.

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Delegate CFO: And it was multiple transactions each month, sometimes one month it would be a couple transactions, sometimes, you know, it would be up to, you know, 14 transactions in a month. So this happened over years and years and years, and one of the things I had informed the detective, because this was going through criminal.

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Delegate CFO: is this individual probably doesn’t even know how much they stole. And again, same thing, is they blew a lot of it on stuff that wasn’t tangible. So, the owner is probably not going to collect, or is going to collect pennies on the dollar. So again, this is all the cost of not doing anything with your respective internal controls.

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Delegate CFO: No.

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Delegate CFO: Excuse me, core internal controls every small business needs.

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Delegate CFO: And actually every business, but in particular small businesses.

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Delegate CFO: Bank reconciliations, they need to be done and done timely.

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Delegate CFO: I actually had a case once where

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Delegate CFO: But it was a bookkeeper for kind of a smallish company, and again, they didn’t monitor her. She ended up, you know, she was committing embezzlement.

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Delegate CFO: But she had never done a bank wreck.

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Delegate CFO: And they never said anything. And we had came in, and we actually weren’t doing a fraud investigation, we were just doing a financial statement audit.

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Delegate CFO: And we can never get the bank wreck. And this had been going… apparently, this has been going on for years. And finally, we got the bank wreck, and there were all these errors in it. And, you know, we just kept asking, why are there errors? And again, that’s eventually where it fell out, that there was, embezzlement.

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Delegate CFO: But if she had been doing the bank rec, or, you know, been doing the bank rec, and timely, and it had been monitored, this would have all been caught, pretty quick. Again, unfortunately, this was one of those situations, and it’s not uncommon that,

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Delegate CFO: the ownership terminated her, I think they went after her civilly, but they didn’t press, criminal charges, and that’s not uncommon.

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Delegate CFO: when criminal charges aren’t filed. Again, that’s…

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Delegate CFO: Due to reputation risk, they don’t, you know, the company doesn’t want to be in the local paper, all that. My recommendation, especially when I take on a new client or a new forensic case.

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Delegate CFO: Is that you prosecute. If there is, obviously, fraud there, that you move it to the criminal aspect, because if you don’t.

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Delegate CFO: person’s gonna do it again, and with all how HR rules are, I believe you can’t tell, you know, the new employer that you fired, you know, Susie because she committed fraud. So, unless there was a criminal charge. So that’s why I always say, if you’re going to do it, make sure you file criminally.

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Delegate CFO: So, other internal control. Many audits done monthly, so…

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Delegate CFO: For our CFO clients, we do mini-audits every month, regardless. And what a mini-audit is, is you take the balance sheet, and you tie out each of those accounts to source documents. So again, cash is going to be the first line item of your balance sheet, should tie out to your bank statement and your bank reconciliation, that should work.

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Delegate CFO: accounts receivable, that should tie out your AR subsidiary ledger. Those two should tie back and forth. Obviously, review your AR subsidiary ledger, make sure there’s old stuff on there that, you know, isn’t suspect. And you go through that, so everything is getting tied out.

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Delegate CFO: And this is actually what we did for one of… we had a client that was a small not-for-profit that had hired a lady to be the controller, but she really didn’t have controller experience.

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Delegate CFO: And so this is literally what we had her do each month, was a mini-audit. And by that is, you know, she just had an old physical binder, she’d print out the trial balance.

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Delegate CFO: Not each of the things, you know, so the bank rec would be your first item right behind the trial balance, and then she’d have her AR subsidiary right behind it. So everything was supported, so she was doing this mini-audit every month. And again, when you do that, if any kind of fraud is happening and being hidden on the balance sheet, it’s going to fall out very quickly.

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Delegate CFO: physical security of assets, including electronics. And by electronic, what I’m talking about is bank statements, and in particular wires, ACHs, those type things.

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Delegate CFO: dual authorization for payments. Again, for certain levels, a lot of companies require dual authorization, and especially on wires, you know, that should have a dual authorization on there that, you know, the person initiates it, and it can’t go through until the owner comes in and signs off as well.

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Delegate CFO: And budget to actual, and as you see there, hint, this is extremely important.

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Delegate CFO: Obviously, you need to have a budget in place, and if you need help with a budget, give us a call. We’ll help you put a budget together for your company.

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Delegate CFO: But every month, you need to do a budget to actual.

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Delegate CFO: Because a lot of times, that is one of those monitoring functions that, a weakness will pop out very quickly. Because let’s say office supplies… let’s say you budgeted $20,000 for the year for office supplies.

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Delegate CFO: We’re in June, and you’re already at 30,000, so you have a 10,000 delta, and you’re only halfway through the year.

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Delegate CFO: that’s going to spark your interest, you’re going to dig down further and find out, okay, why do we put $30,000 in there when we only budgeted 20 for the entire year? And so then that becomes one of your monitoring control functions. And again, this is huge for internal controls.

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Delegate CFO: If you go back and look at a lot of the videos on Elon Musk when he was doing the Doge, issues.

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Delegate CFO: One of the things he noted in one of his interviews

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Delegate CFO: was the lack of budgets in the, some of those federal departments. Well, if you don’t have a budget, how do you know you’re going to be over budget, under budget, and expenses authorized, if you’re not being able to compare it to something? So, that’s why we say budget to actual i