Keep the Honest People Honest
Originally published: 11.01.17 by Ruth King
If you’ve been unlucky enough to find that an employee has been stealing from you, then you’ve probably asked this important question: Should I prosecute that person?
If you face this situation, you must first determine if this is a civil or criminal charge? An example of a civil charge is when you give your bookkeeper check signing authority and she steals. A criminal charge is when your bookkeeper forges a check or has direct withdrawals taken from your bank account without being an authorized signatory on that account. As a rule, criminal charges are easier to get a cnviction.
What if the thief offers to repay the funds? For example, he could have a rich relative willing to repay the funds to keep him out of jail? Do you take that as a settlement or not?
There is no right or wrong answer to this question. It depends on how much hassle you’re willing to put up with during the investigation and court cases. Some owners learn from the event, put the proper procedures in place and move on.
They don’t want the hassles of lawyers and courts. And, they don’t want the possibility of a lenient judge who gives no jail time to a first time offender.
Others feel that the thief should be prosecuted, no matter what. They put up with the few years of hassles for the satisfaction of seeing the thief in “an orange jumpsuit.”
Remember, if you simply fire the thief, that person will steal from the next small business owner for whom he or she works.
Whether you decide to prosecute or not, you should report the theft to the Internal Revenue Service (IRS). Many owners think they should report the theft on a 1099 or W-2 form. The best place to report it, however, is probably on the IRS form 3949A. This is an information referral form for reporting potential violations of the IRS law.
This way, the IRS will potentially start an investigation and an audit. At least the thief, if you don’t prosecute, has the potential of going through a tax audit.
Check with your accountant for the latest tax rulings. As of now, embezzled funds are deductible in the year in which they’re discovered. They’re considered other expenses.
Even if the theft has been happening for many years, if you discovered it this year, then the deduction is taken from this year.
The tricky part is when you accept a repayment plan. These are taxable in subsequent years. If you charge interest, the repayment plan could be treated as a loan with interest.
In these cases, the repayment is considered a reduction of debt, with the interest expense reported as income.
The best thing to do is get over the embarrassment of talking with your CPA. She has probably been involved with many small business embezzlements. She can point you in the right direction with respect to reporting the embezzlement on your taxes.
Tips to Remember
I’ve covered a number of ways employees can steal from your company these past several months — and it may be a bit overwhelming. As a reminder, here’s a summary of some important tips.
Protect your cash and other assets. First, if you aren’t getting your financial statements on time or they’re constantly filled with mistakes, don’t accept excuses from your bookkeeper. Her job is bookkeeping! It’s her responsibility to get you accurate information in a timely manner.
Usually, if you don’t get your financial statements on time, get computer excuses or receive another lame excuse, the bookkeeper is incompetent or stealing from you. Decide which is happening and take action.
Cash must be controlled and monitored. Without cash your business cannot survive for long. Even if you have a profitable company, if you don’t turn those profits into cash through collecting your receivables, you will be out of business.
Once cash and materials come in the door, take steps to protect them. Great procedures keep your honest employees honest. They show that you’re watching and checking. There is less temptation when the procedures are in place and monitored.
Look at your bank accounts online every day and make sure your bank statements are mailed to your home. Make sure the checks are correct and your signature is on all checks. Look at the pictures of the checks. Look at deposits and withdrawals. If something doesn’t look right, question it. Once you have looked at the bank statement bring it to the bookkeeper to balance the checkbook.
Your bookkeeper should never have check signing authority. That is, unless your bookkeeper is your spouse or owns part of the business.
Enter your expenses stated on your P&L into an Excel spread sheet. You don’t have to do it every month, just a few times a year.
Review financial statements every month. Analyze your balance sheet and profit and loss statement (take a class at funfinancials.com, or read my book, “The Courage to be Profitable,” which explains how to read financial statements in plain English).
Watch what you sign. If a check looks wrong, question it and ask for backup.