Recently, quite a few conversations I had with business owners and finance professionals were around how to protect the value they’ve built in a company during exit planning. One of the conversations I had with the COO of a local company went like this:
COO: We had an accountant many years ago who we thought was doing a great job for us. He had worked for us for 5 years and we didn’t know that he was stealing money from us until after he dropped dead!
Stella: Let me guess… he also never took a vacation either.
COO: Come to think of it, you are right, Stella!
Poor internal control, or lack thereof, provides employees the perfect opportunity to steal at the expense of your business. Had the company instituted and enforced a mandatory vacation policy, it could have given the fraud scheme to unravel on its own. Embezzlement comes in many forms and stealing cash from a business, when the ingredients are ripe, is one of the easiest ways to commit fraud. Here are the ingredients required for the perfect storm:
Opportunity – let’s say you are walking your dog in a park and you come upon a wallet with money inside on a bench. What do you do?
Rationalization – on the rare occasion, an ethical personal may hand the wallet over to the park ranger or the police. However, most likely, someone will pocket the wallet and rationalize “finder’s keeper”.
Pressure – let’s say the person who discovers the wallet has financial hardship. The person may not make a lot of money and has overdue bills at home. Now this person could be more likely to pocket the wallet.
Internal control comes in many forms. It could include the followings:
- Owner, senior management or board of directors setting tone at the top letting everyone in the business know that unethical behaviors are not acceptable and could have severe consequences to the fraudsters’ personal and professional life.
- Segregate duties to include more than one person in processes so that people can cross-check each other, reducing fraud incidents and the likelihood of errors.
- Restrict access to computer records so that information is only made available to people who need it to conduct specific tasks. Doing so reduces the risk of information theft and the risk of asset theft through the modification of ownership records.
- Safeguard assets, either through electronic control or physical control when not in use, making it more difficult to steal them. This includes the company’s cash, accounts receivable, marketable securities, inventory and other valuable assets.
Often time, business owners are not willing to invest upfront cost to protect their businesses and they end up paying for it dearly at the end. These problems could have been prevented right from the beginning. When nothing bad happens, we are tempted to think that the risks are low and that the business is properly protected. However, ignoring the risks could have catastrophic consequences in the long run and therefore, much more expensive, as supposed to addressing the risks right now. An experienced advisor can help identify and address the risks in your internal control and help you protect the value you’ve built in your business through blood, sweat and tears! This will make a successful exit more likely and uneventful!
If minimizing the threat to the business value you’ve built has been on your mind, but you haven’t focused your attention on, contact us today so that we can begin to help preserve your legacy for you.
Special invitation: CFO Connections will be partnering with local merger and acquisition experts in September to host a lunch and learn event on protecting business value. Please send an e-mail to firstname.lastname@example.org to reserve your special invitation. This lunch and learn is limited to a small group of local business owners so hurry before we reach our limit.