Asset Protection for the Small Business

retail risk assessment

The protection of company assets in the small office is normally very informal and left to the honesty of the employees. Unfortunately, this is not always effective and appropriate.

Recently, in a large metropolitan area, a man who ran the IT department for a large dental firm was accused of allegedly stealing almost $2 million worth of computer equipment from his employer. The suspect always had ostensibly good computer technology reasons for going over budget on computer purchases. This was an example of mistaken trust in the individual becoming very expensive. The question is how do you prevent this type of situation without bringing the work environment to a standstill?

The first step in prevention is determining the personal qualities of the individual employee. We like to think that the people we hire will be of high integrity and protect the assets of their employer. In most cases, this is a valid assumption. However, one dishonest employee can potentially put a business into bankruptcy or cause significant business losses. Therefore, it is important to protect against this exception to ensure business viability.

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As a minimum, prior to hiring individuals who will have access to money, checking accounts, purchasing, or inventory control, a criminal records check should be conducted in all areas where the applicant has resided or worked during the previous seven years. Because of the inaccuracy of many court records, all previous employers should be contacted to identify any potential problems and the applicant’s integrity.

The purchasing function is only one of several areas vulnerable to illegal activity. Instituting special controls over this function will help safeguard your business investment and can be accomplished without being a strenuous burden on business income-generating activities. It is important that there be written instructions or policies defining expected procedures, and that all employees acknowledge awareness of these procedures. Important for inclusion in these procedures is a statement that actual or suspected theft “may” be reported to the appropriate law enforcement agency for investigation and possible prosecution. Using the word “may” is suggested because it provides discretionary latitude for the business owner in the event of unusual circumstances. The use of definitive terms such as “will” could result in litigation if there is any exception to the law enforcement reporting statement. Upon adoption of such procedures and requirements, each employee should acknowledge awareness by signing a copy of the relevant document. In the event of future litigation or criminal action, the employee cannot use the excuse that they were not aware of the correct purchasing procedures.

The purchasing and accounts payable functions are the vital components of asset protection. Each function should be controlled by a separate individual to reduce the potential for theft and fund diversion. In the small office, the business owner may have dual roles of providing professional services and controlling financial expenditures.

It is necessary to define purchasing limits to ensure appropriate functioning of the business. Each purchase above a defined dollar value should require use of a sequentially numbered purchase order. Regardless of dollar value, it may be wise to require certain types of equipment and supplies be subject to a purchase order; for example, items that may be in high demand on the illegal market such as pharmaceutical items.

Any item subject to a sequentially numbered purchase order should require authorization by two individuals—one person being the individual responsible for procurement of the item and a second person who is not in the procurement and payment cycle. This increases the number of individuals required to participate in the successful theft of business assets. Upon approval, one copy of the purchase order should go to the vendor, a second copy to a consolidated purchase order file, and a third copy to the person responsible for accounts payable.

Upon receipt of the items, the invoice or other shipping document should be forwarded to the accounts payable person for attachment to the purchase order. The person receiving the item from the vendor should acknowledge receipt of the items by signing the invoice documents with “received,” their name, and date of receipt.

The accounts payable person should verify the details of the invoice against the purchasing documents upon receipt of the purchases and prior to any payments to the vendor. Upon receipt of the periodic bank statement, the check payment details should be verified against the invoice and purchasing documents to ensure there is no manipulation of documentation or payments. Credit card purchases should be handled in a similar manner.

High dollar value non-perishable items should have an inventory sticker placed on the item showing the name of the owning business. Also, items of this type should be entered into an inventory log and identified with a company serial number and any serial number appearing on the item. Quarterly inventories should be conducted by an individual not associated with the purchasing or inventory control process. Depending on the size of the inventory, a less than total inventory can be conducted as long as all sensitive items are inventoried on a semi-annual basis. The inventory log can be established in any manner that meets the needs of the business. A recommended method is a series of cards for each item which depicts a description of the item, any serial numbers, the company inventory number, item value, and inventory dates. Periodic unannounced spot check inventories should be conducted by the business owner to verify the adequacy and accuracy of the inventory.

A quarterly review of the purchasing budget should be conducted. Any budget excess or unusual activity should require an explanation by the responsible employee and be documented in the appropriate file.

The final decision on how to protect your assets is a business decision that weighs the restrictions on purchasing against the impact on business operations. The business owner must decide on financial and business impact limits that require more strict control of purchasing and asset control.

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