The following headline appeared in our local newspaper this morning:
Atco woman accused of embezzling $3M from employer
The business owner was foreign and trusted the (former) employee who used corporate credit cards for personal expenses for a period of seven years while the business was continuing to grow and prosper. This wasn’t an insurance agency situation but a simple search for insurance agency embezzlement will give you “hours of entertainment” – many about insurance businesses in which the owners delegated the financial management to others while NOT paying close enough attention.
Please don’t use this issue to try to keep all financial management in the hands of the owners. Most of us are already in the position that we can either deal with customers and carriers OR deal with checking payables and writing checks – but not both.
Successful agency owners learn to hire and trust others to balance accounts, approve and pay bills and justify payables. The problem is that too many of us trust so blindly that we fail to read our own financials and review our own bills. The result can be “borrowing” leading to a regular “temporary” loan that could become true embezzlement.
Even if your financial manager is your partner, wife, child, or years-long trusted employee, guarding your business will always be the responsibility of the agency owners.
Our recommendation is that if you are a small agency (under $1 Million revenue), you approve all bills over $100 and have your financial manager refer to you any anomalies (out of the ordinary) payments or bills. As a larger agency owner with many bills each month, you define a standard beyond which your approval is needed and still have any bill strange or different referred to you for approval before payment. Many agency owners, including owners of substantial businesses, still sign ALL checks (or all checks over a certain amount).
It’s not surprising that embezzlement occurs in more small firms than in large ones with audit procedures. Small agency owners tend to trust more, tend to be more involved in insurance related matters than in financial matters (as long as no drastic shortfall is noted). But implementing occasional audits (reviewing all bills and checks a few times a year) is not a sign of mistrust. Just knowing that the boss will look at all checks written a few times a year will remove any temptation for wrong-doing from the realm of possibility.
Similarly, we cajole and try to influence agency owners of all size businesses to read and understand their Operating Statements and Balance Sheets every month. They are the first indicators if something is wrong or going wrong in your business. The monthly Operating Statements will show you if some expense is unusually low, high or is trending differently than historically. The Balance Sheet is very much like the results of an encompassing blood test. The liquidity ratios derived from the balance sheet will tell you of the health of your agency and whether you are trending in the right or wrong direction. These tools are also the first indicators that you need to explore one area more for unusual occurrences. Call me (Al Diamond) at 856 779 2430 (al@agencyconsulting.com) for more information on how to read Operating Statements and Balance Sheets.
Most employee embezzlement begins with a temporary borrowing of a small amount that is readily returned. But a successful ‘borrow and replace’ leads to other similar transactions that gradually build and get out of control. In the case above, the employee was a long-term trusted employee who just gradually got into trouble and the problem built up until it could not be replaced. When this occurred without notice since the company was growing and remained profitable it grew from petty theft to embezzlement.
President Reagan deftly took an old Russian proverb, “Doveryai, No Proveryai” and translated it into his favorite saying, “Trust, but Verify”. That saying should hang above every business-owner’s desk as a constant reminder of the care that needs to be taken in the conduct of YOUR business.